[House Report 116-161]
[From the U.S. Government Publishing Office]


   116th Congress }                                  {   Report
                        HOUSE OF REPRESENTATIVES 
   1st Session    }                                  {  116-161
                                                       
_______________________________________________________________________

                                     


             PROMOTING RESPECT FOR INDIVIDUALS' DIGNITY AND
                          EQUALITY ACT OF 2019

                               ----------                              

                              R E P O R T

                                 OF THE

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                                   on

                               H.R. 3299

      [Including cost estimate of the Congressional Budget Office]

                             together with

                             MINORITY VIEWS
                             

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



                 July 18, 2019.--Ordered to be printed
                 
                 
                 
                 



             PROMOTING RESPECT FOR INDIVIDUALS' DIGNITY AND

                          EQUALITY ACT OF 2019
                          
                          
                          
                          
                          
                          
116th Congress   }                                          {     Report
                         HOUSE OF REPRESENTATIVES                 
1st Session      }                                          {    116-161
_______________________________________________________________________

                                     


             PROMOTING RESPECT FOR INDIVIDUALS' DIGNITY AND

                          EQUALITY ACT OF 2019

                               __________

                              R E P O R T

                                 OF THE

                      COMMITTEE ON WAYS AND MEANS

                        HOUSE OF REPRESENTATIVES

                                   on

                               H.R. 3299

      [Including cost estimate of the Congressional Budget Office]

                             together with

                             MINORITY VIEWS
                             
                             

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



                 July 18, 2019.--Ordered to be printed
                 
                            ________
                 
                 U.S. GOVERNMENT PUBLISHING OFFICE
                   
37-115                 WASHINGTON : 2019    
 
 
 
                 
                 
                            C O N T E N T S

                                                                   Page
I. SUMMARY AND BACKGROUND........................................     7
    A. Purpose and Summary.......................................     7
    B. Background and Need for Legislation.......................     8
    C. Legislative History.......................................     8
II. EXPLANATION OF THE BILL......................................     9
    A. Extension of period of limitation for certain legally 
      married couples (sec. 2 of the bill and sec. 6511 of the 
      Code)......................................................     9
    B. Rules relating to all legally married couples, and rules 
      relating to the gender of spouses, etc. (secs. 3 and 4 of 
      the bill)..................................................    11
III. VOTES OF THE COMMITTEE......................................    12
IV. BUDGET EFFECTS OF THE BILL...................................    12
    A. Committee Estimate of Budgetary Effects...................    12
    B. Statement Regarding New Budget Authority and Tax 
      Expenditures Budget Authority..............................    14
    C. Cost Estimate Prepared by the Congressional Budget Office.    14
V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE....    15
    A. Committee Oversight Findings and Recommendations..........    15
    B. Statement of General Performance Goals and Objectives.....    16
    C. Information Relating to Unfunded Mandates.................    16
    D. Applicability of House Rule XXI, Clause 5(b)..............    16
    E. Tax Complexity Analysis...................................    16
    F. Congressional Earmarks, Limited Tax Benefits, and Limited 
      Tariff Benefits............................................    16
    G. Duplication of Federal Programs...........................    17
    H. Hearings..................................................    17
VI. CHANGES IN EXISTING LAW MADE BY THE BILL.....................    17
    A. Changes in Existing Law Proposed by the Bill..............    17
VII. MINORITY VIEWS..............................................   588






116th Congress   }                                           {   Report
                        HOUSE OF REPRESENTATIVES
 1st Session     }                                           {  116-161

======================================================================



 
  PROMOTING RESPECT FOR INDIVIDUALS' DIGNITY AND EQUALITY ACT OF 2019

                                _______
                                

 July 18, 2019.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

Mr. Neal, from the Committee on Ways and Means, submitted the following

                              R E P O R T

                             together with

                             MINORITY VIEWS

                        [To accompany H.R. 3299]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Ways and Means, to whom was referred the 
bill (H.R. 3299) to permit legally married same-sex couples to 
amend their filing status for income tax returns outside the 
statute of limitations, to amend the Internal Revenue Code of 
1986 to clarify that all provisions shall apply to legally 
married same-sex couples in the same manner as other married 
couples, and for other purposes, having considered the same, 
report favorably thereon with an amendment and recommend that 
the bill as amended do pass.
    The amendment is as follows:
  Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE.

  This Act may be cited as the ``Promoting Respect for Individuals' 
Dignity and Equality Act of 2019'' or as the ``PRIDE Act of 2019''.

SEC. 2. EXTENSION OF PERIOD OF LIMITATION FOR CERTAIN LEGALLY MARRIED 
                    COUPLES.

  (a) In General.--In the case of an individual first treated as 
married for purposes of the Internal Revenue Code of 1986 by the 
application of the holdings of Revenue Ruling 2013-17--
          (1) if such individual filed a return (other than a joint 
        return) for a taxable year ending before September 16, 2013, 
        for which a joint return could have been made by the individual 
        and the individual's spouse but for the fact that such holdings 
        were not effective at the time of filing, such return shall be 
        treated as a separate return within the meaning of section 
        6013(b) of such Code and the time prescribed by section 
        6013(b)(2)(A) of such Code for filing a joint return after 
        filing a separate return shall not expire before the date 
        prescribed by law (including extensions) for filing the return 
        of tax for the taxable year that includes the date of the 
        enactment of this Act, and
          (2) in the case of a joint return filed pursuant to paragraph 
        (1)--
                  (A) the period of limitation prescribed by section 
                6511(a) of such Code for any such taxable year shall be 
                extended until the date prescribed by law (including 
                extensions) for filing the return of tax for the 
                taxable year that includes the date of the enactment of 
                this Act, and
                  (B) section 6511(b)(2) of such Code shall not apply 
                to any claim of credit or refund with respect to such 
                return.
  (b) Amendments, etc. Restricted to Change in Marital Status.--
Subsection (a) shall apply only with respect to amendments to the 
return of tax, and claims for credit or refund, relating to a change in 
the marital status for purposes of the Internal Revenue Code of 1986 of 
the individual.

SEC. 3. RULES RELATING TO ALL LEGALLY MARRIED COUPLES.

  (a) In General.--The Internal Revenue Code of 1986 is amended--
          (1) in section 21(d)(2)--
                  (A) by striking ``himself'' in the heading and 
                inserting ``self''; and
                  (B) by striking ``any husband and wife'' and 
                inserting ``any married couple'';
          (2) in section 22(e)(1)--
                  (A) by striking ``husband and wife who live'' and 
                inserting ``married couple who lives''; and
                  (B) by striking ``the taxpayer and his spouse'' and 
                inserting ``the taxpayer and the spouse of the 
                taxpayer'';
          (3) in section 38(c)(6)(A), by striking ``husband or wife who 
        files'' and inserting ``married individual who files'';
          (4) in section 42(j)(5)(C), by striking clause (i) and 
        inserting the following new clause:
                          ``(i) Married couple treated as 1 partner.--
                        For purposes of subparagraph (B), individuals 
                        married to one another (and their estates) 
                        shall be treated as 1 partner.'';
          (5) in section 62(b)(3)--
                  (A) in subparagraph (A)--
                          (i) by striking ``husband and wife who lived 
                        apart'' and inserting ``married couple who 
                        lived apart''; and
                          (ii) by striking ``the taxpayer and his 
                        spouse'' and inserting ``the taxpayer and the 
                        spouse of the taxpayer''; and
                  (B) in subparagraph (D), by striking ``husband and 
                wife'' and inserting ``married couple'';
          (6) in section 121--
                  (A) in subsection (b)(2), by striking ``husband and 
                wife who make'' and inserting ``married couple who 
                makes''; and
                  (B) in subsection (d)(1), by striking ``husband and 
                wife make'' and inserting ``married couple makes'';
          (7) in section 165(h)(4)(B), by striking ``husband and wife'' 
        and inserting ``married couple'';
          (8) in section 179(b)(4), by striking ``a husband and wife 
        filing'' and inserting ``individuals married to one another who 
        file'';
          (9) in section 213(d)(8), by striking ``status as husband and 
        wife'' and inserting ``marital status'';
          (10) in section 219(g)(4), in the matter preceding 
        subparagraph (A), by striking ``A husband and wife'' and 
        inserting ``Married individuals'';
          (11) in section 274(b)(2)(B), by striking ``husband and 
        wife'' and inserting ``married couple'';
          (12) in section 643(f), by striking ``husband and wife'' in 
        the second sentence and inserting ``married couple'';
          (13) in section 761(f)--
                  (A) in paragraph (1), by striking ``husband and 
                wife'' and inserting ``married couple''; and
                  (B) in paragraph (2)(A), by striking ``husband and 
                wife'' and inserting ``married couple'';
          (14) in section 911--
                  (A) in subsection (b)(2), by striking subparagraph 
                (C) and inserting the following new subparagraph:
                  ``(C) Treatment of community income.--In applying 
                subparagraph (A) with respect to amounts received from 
                services performed by a married individual which are 
                community income under community property laws 
                applicable to such income, the aggregate amount which 
                may be excludable from the gross income of such 
                individual and such individual's spouse under 
                subsection (a)(1) for any taxable year shall equal the 
                amount which would be so excludable if such amounts did 
                not constitute community income.''; and
                  (B) in subsection (d)(9)(A), by striking ``where a 
                husband and wife each have'' and inserting ``where both 
                spouses have'';
          (15) in section 1244(b)(2), by striking ``a husband and wife 
        filing'';
          (16) in section 1272(a)(2)(D), by striking clause (iii) and 
        inserting the following new clause:
                          ``(iii) Treatment of a married couple.--For 
                        purposes of this subparagraph, a married couple 
                        shall be treated as 1 person. The preceding 
                        sentence shall not apply where the spouses 
                        lived apart at all times during the taxable 
                        year in which the loan is made.'';
          (17) in section 1313(c)(1), by striking ``husband and wife'' 
        and inserting ``spouses'';
          (18) in section 1361(c)(1)(A)(i), by striking ``a husband and 
        wife'' and inserting ``a married couple'';
          (19) in section 2040(b), by striking ``Certain Joint 
        Interests of Husband and Wife'' in the heading and inserting 
        ``Certain Joint Interests of Married Couple'';
          (20) in section 2513--
                  (A) by striking ``gift by husband 
                or wife to third party'' 
                in the heading and inserting ``gift by 
                spouse to third party''; and
                  (B) by striking paragraph (1) of subsection (a) and 
                inserting the following new paragraph:
          ``(1) In general.--A gift made by one individual to any 
        person other than such individual's spouse shall, for the 
        purposes of this chapter, be considered as made one-half by the 
        individual and one-half by such individual's spouse, but only 
        if at the time of the gift each spouse is a citizen or resident 
        of the United States. This paragraph shall not apply with 
        respect to a gift by an individual of an interest in property 
        if such individual creates in the individual's spouse a general 
        power of appointment, as defined in section 2514(c), over such 
        interest. For purposes of this section, an individual shall be 
        considered as the spouse of another only if the individual is 
        married to the individual's spouse at the time of the gift and 
        does not remarry during the remainder of the calendar year.'';
          (21) in section 2516--
                  (A) by striking ``Where a husband and wife enter'' 
                and inserting the following:
  ``(a) In General.--Where a married couple enters''; and
                  (B) by adding at the end the following new 
                subsection:
  ``(b) Spouse.--For purposes of this section, if the spouses referred 
to are divorced, wherever appropriate to the meaning of this section, 
the term `spouse' shall read `former spouse'.'';
          (22) in section 5733(d)(2), by striking ``husband or wife'' 
        and inserting ``married individual'';
          (23) in section 6013--
                  (A) by striking ``joint returns of
                income tax by husband and
                wife'' in the heading and inserting ``joint 
                returns of income tax by
                a married couple'';
                  (B) in subsection (a), in the matter preceding 
                paragraph (1), by striking ``husband and wife'' and 
                inserting ``married couple'';
                  (C) in subsection (a)(1), by striking ``either the 
                husband or wife'' and inserting ``either spouse'';
                  (D) in subsection (a)(2)--
                          (i) by striking ``husband and wife'' and 
                        inserting ``spouses''; and
                          (ii) by striking ``his taxable year'' and 
                        inserting ``such spouse's taxable year'';
                  (E) in subsection (a)(3)--
                          (i) by striking ``his executor or 
                        administrator'' and inserting ``the decedent's 
                        executor or administrator'';
                          (ii) by striking ``with respect to both 
                        himself and the decedent'' and inserting ``with 
                        respect to both the surviving spouse and the 
                        decedent''; and
                          (iii) by striking ``constitute his separate 
                        return'' and inserting ``constitute the 
                        survivor's separate return'';
                  (F) in subsection (b), by striking paragraph (1) and 
                inserting the following new paragraph:
          ``(1) In general.--Except as provided in paragraph (2), if an 
        individual has filed a separate return for a taxable year for 
        which a joint return could have been made by the individual and 
        the individual's spouse under subsection (a) and the time 
        prescribed by law for filing the return for such taxable year 
        has expired, such individual and such spouse may nevertheless 
        make a joint return for such taxable year. A joint return filed 
        under this subsection shall constitute the return of the 
        individual and the individual's spouse for such taxable year, 
        and all payments, credits, refunds, or other repayments made or 
        allowed with respect to the separate return of either spouse 
        for such taxable year shall be taken into account in 
        determining the extent to which the tax based upon the joint 
        return has been paid. If a joint return is made under this 
        subsection, any election (other than the election to file a 
        separate return) made by either spouse in a separate return for 
        such taxable year with respect to the treatment of any income, 
        deduction, or credit of such spouse shall not be changed in the 
        making of the joint return where such election would have been 
        irrevocable if the joint return had not been made. If a joint 
        return is made under this subsection after the death of either 
        spouse, such return with respect to the decedent can be made 
        only by the decedent's executor or administrator.'';
                  (G) in subsection (c), by striking ``husband and 
                wife'' and inserting ``spouses'';
                  (H) in subsection (d)(1), by striking ``status as 
                husband and wife'' and inserting ``the marital status 
                with respect to each other'';
                  (I) in subsection (d)(2), by striking ``his spouse'' 
                and inserting ``the spouse of the individual'';
                  (J) in subsection (f)(2)(B), by striking ``such 
                individual, his spouse, and his estate shall be 
                determined as if he were alive'' and inserting ``such 
                individual, the individual's spouse, and the 
                individual's estate shall be determined as if the 
                individual were alive''; and
                  (K) in subsection (f)(3)--
                          (i) in subparagraph (A), by striking ``for 
                        which he is entitled'' and inserting ``for 
                        which such member is entitled''; and
                          (ii) in subparagraph (B), by striking ``for 
                        which he is entitled'' and inserting ``for 
                        which such employee is entitled'';
          (24) in section 6014(b), by striking ``husband and wife'' in 
        the second sentence and inserting ``a married couple'';
          (25) in section 6017, by striking ``husband and wife'' and 
        inserting ``married couple'';
          (26) in section 6096(a), by striking ``of husband and wife 
        having'' and inserting ``reporting'';
          (27) in section 6166(b)(2), by striking subparagraph (B) and 
        inserting the following new subparagraph:
                  ``(B) Certain interests held by married couple.--
                Stock or a partnership interest which--
                          ``(i) is community property of a married 
                        couple (or the income from which is community 
                        income) under the applicable community property 
                        law of a State, or
                          ``(ii) is held by a married couple as joint 
                        tenants, tenants by the entirety, or tenants in 
                        common,
                shall be treated as owned by 1 shareholder or 1 
                partner, as the case may be.'';
          (28) in section 6212(b)(2)--
                  (A) by striking ``return filed by husband and wife'' 
                and inserting ``return''; and
                  (B) by striking ``his last known address'' and 
                inserting ``the last known address of such spouse'';
          (29) in section 7428(c)(2)(A), by striking ``husband and 
        wife'' and inserting ``married couple'';
          (30) in section 7701(a)--
                  (A) by striking paragraph (17); and
                  (B) in paragraph (38), by striking ``husband and 
                wife'' and inserting ``married couple''; and
          (31) in section 7872(f), by striking paragraph (7) and 
        inserting the following new paragraph:
          ``(7) Married couple treated as 1 person.--A married couple 
        shall be treated as 1 person.''.
  (b) Conforming Amendments.--
          (1) The table of sections for subchapter B of chapter 12 of 
        the Internal Revenue Code of 1986 is amended by striking the 
        item relating to section 2513 and inserting the following new 
        item:

``Sec. 2513. Gift by spouse to third party.''.

          (2) The table of sections for subpart B of part II of 
        subchapter A of chapter 61 of such Code is amended by striking 
        the item relating to section 6013 and inserting the following 
        new item:

``Sec. 6013. Joint returns of income tax by a married couple.''.

SEC. 4. RULES RELATING TO THE GENDER OF SPOUSES, ETC.

  (a) In General.--The following provisions of the Internal Revenue 
Code of 1986 are each amended by striking ``his spouse'' each place it 
appears and inserting ``the individual's spouse'':
          (1) Subsections (a)(1) and (d) of section 1.
          (2) Section 2(b)(2)(A).
          (3) Subsections (d)(1)(B) and (e)(3) of section 21.
          (4) Section 36(c)(5).
          (5) Section 179(d)(2)(A).
          (6) Section 318(a)(1)(A)(i).
          (7) Section 408(d)(6).
          (8) Section 469(i)(5)(B)(ii).
          (9) Section 507(d)(2)(B)(iii).
          (10) Clauses (ii) and (iii) of section 613A(c)(8)(D).
          (11) Section 672(e)(2).
          (12) Section 704(e)(2).
          (13) Subparagraphs (A) and (B)(ii) of section 911(c)(3).
          (14) Section 1235(c)(2).
          (15) Section 1563(e)(5).
          (16) Section 3121(b)(3)(B).
          (17) Section 4946(d).
          (18) Section 4975(e)(6).
          (19) Subparagraphs (A)(iv) and (B) of section 6012(a)(1).
          (20) Section 7703(a).
  (b) Conforming Amendments.--
          (1) The following provisions of the Internal Revenue Code of 
        1986 are each amended by striking ``his spouse'' each place it 
        appears and inserting ``the taxpayer's spouse'':
                  (A) Section 2(a)(2)(B).
                  (B) Subparagraphs (B) and (C) of section 2(b)(2).
                  (C) Paragraphs (2) and (6)(A) of section 21(e).
                  (D) Section 36B(e)(1).
                  (E) Section 63(e)(3)(B).
                  (F) Section 86(c)(1)(C)(ii).
                  (G) Section 105(c)(1).
                  (H) Section 135(d)(3).
                  (I) Section 151(b).
                  (J) Subsections (a) and (d)(7) of section 213.
                  (K) Section 1233(e)(2)(C).
                  (L) Section 1239(b)(2).
                  (M) Section 6504(2).
          (2) The following provisions of the Internal Revenue Code of 
        1986 are each amended by striking ``his spouse'' each place it 
        appears and inserting ``the employee's spouse'':
                  (A) Section 132(m)(1).
                  (B) Section 401(h)(6).
                  (C) Section 3402(l)(3).
          (3) The following provisions of the Internal Revenue Code of 
        1986 are each amended by striking ``his taxable year'' each 
        place it appears and inserting ``the individual's taxable 
        year'':
                  (A) Section 2(b)(1).
                  (B) Section 7703(a)(1).
          (4) The following provisions of the Internal Revenue Code of 
        1986 are each amended by striking ``his taxable year'' each 
        place it appears and inserting ``the taxpayer's taxable year'':
                  (A) Subparagraphs (B) and (C) of section 2(b)(2) (as 
                amended by paragraph (1)(B)).
                  (B) Section 63(f)(1)(A).
          (5) The following provisions of the Internal Revenue Code of 
        1986 are each amended by striking ``his home'' and inserting 
        ``the individual's home'':
                  (A) Section 2(b)(1)(A).
                  (B) Section 21(e)(4)(A)(i).
                  (C) Section 7703(b)(1).
          (6) The Internal Revenue Code of 1986, as amended by this 
        section, is amended--
                  (A) in section 2(a)(1)(A), by striking ``his two 
                taxable years'' and inserting ``the taxpayer's two 
                taxable years'';
                  (B) in section 2(a)(1)(B), by striking ``his home'' 
                and inserting ``the taxpayer's home'';
                  (C) in paragraphs (1)(A) and (2)(A) of section 63(f), 
                by striking ``for himself if he'' both places it 
                appears and inserting ``for the taxpayer if the 
                taxpayer'';
                  (D) in section 63(f)(4), by striking ``his'' both 
                places it appears and inserting ``the individual's'';
                  (E) in section 105(b)--
                          (i) by striking ``his spouse, his 
                        dependents'' and inserting ``the taxpayer's 
                        spouse, the taxpayer's dependents''; and
                          (ii) by striking ``by him'';
                  (F) in the heading of section 119(a), by striking ``, 
                His Spouse, and His Dependents'' and inserting ``and 
                the Employee's Spouse and Dependents'';
                  (G) in section 119(a), by striking ``him, his spouse, 
                or any of his dependents by or on behalf of his 
                employer'' and inserting ``the employee or the 
                employee's spouse or dependents by or on behalf of the 
                employer of the employee'';
                  (H) in section 119(a)(2), by striking ``his'' both 
                places it appears and inserting ``the employee's'';
                  (I) in section 119(d)(3)(B), by striking ``his 
                spouse, and any of his dependents'' and inserting ``the 
                employee's spouse, and any of the employee's 
                dependents'';
                  (J) in section 129(b)(2), by striking ``himself'' and 
                inserting ``the spouse's self'';
                  (K) in section 170(b)(1)(F)(iii)--
                          (i) by striking ``his spouse'' and inserting 
                        ``the spouse of such donor''; and
                          (ii) by striking ``his death or after the 
                        death of his surviving spouse if she'' and 
                        inserting ``the death of the donor or after the 
                        death of the donor's surviving spouse if such 
                        surviving spouse'';
                  (L) in section 213(c)(1)--
                          (i) by striking ``his estate'' and inserting 
                        ``the estate of the taxpayer''; and
                          (ii) by striking ``his death'' and inserting 
                        ``the death of the taxpayer'';
                  (M) in section 213(d)(7), by striking ``he'' and 
                inserting ``the taxpayer'';
                  (N) in section 217(g)--
                          (i) by striking ``, his spouse, or his 
                        dependents'' in paragraph (2) and inserting 
                        ``or the spouse or dependents of such member'';
                          (ii) by striking ``his dependents'' in 
                        paragraph (3) and inserting ``dependents''; and
                          (iii) by striking ``his spouse'' each place 
                        it appears in paragraph (3) and inserting ``the 
                        member's spouse'';
                  (O) in section 217(i)(3)(A), by striking ``his'';
                  (P) in section 267(c), by striking ``his'' each place 
                it appears and inserting ``the individual's'';
                  (Q) in section 318(a)(1)(A)(ii), by striking ``his'' 
                and inserting ``the individual's'';
                  (R) in section 402(l)(4)(D), by striking ``, his 
                spouse, and dependents'' and inserting ``and the spouse 
                and dependents of such officer'';
                  (S) in section 415(l)(2)(B), by striking ``, his 
                spouse, or his dependents'' and inserting ``or the 
                participant's spouse or dependents'';
                  (T) in section 420(f)(6)(A), by striking ``his 
                covered spouse and dependents'' each place it appears 
                and inserting ``the covered spouse and dependents of 
                such retiree'';
                  (U) in section 424(d)(1), by striking ``his'' and 
                inserting ``the individual's'';
                  (V) in section 544(a)(2), by striking ``his'' each 
                place it appears and inserting ``the individual's'';
                  (W) in section 911(c)(3), by striking ``him'' each 
                place it appears in subparagraphs (A) and (B)(ii) and 
                inserting ``the individual'';
                  (X) in section 1015(d)(3), by striking ``his spouse'' 
                and inserting ``the donor's spouse'';
                  (Y) in section 1563(e)--
                          (i) by striking ``his children'' both places 
                        it appears in paragraphs (5)(D) and (6)(A) and 
                        inserting ``the individual's children''; and
                          (ii) by striking ``his parents'' both places 
                        it appears in subparagraphs (A) and (B) of 
                        paragraph (6) and inserting ``the individual's 
                        parents'';
                  (Z) in section 1563(f)(2)(B), by striking ``him'' and 
                inserting ``the individual'';
                  (AA) in section 2012(c), by striking ``his spouse'' 
                and inserting ``the decedent's spouse'';
                  (BB) in section 2032A(e)(10), by striking ``his 
                surviving spouse'' and inserting ``the decedent's 
                surviving spouse'';
                  (CC) in section 2035(b)--
                          (i) by striking ``his estate'' and inserting 
                        ``the decedent's estate''; and
                          (ii) by striking ``his spouse'' and inserting 
                        ``the decedent's spouse'';
                  (DD) in subsections (a) and (b)(5) of section 2056, 
                by striking ``his'';
                  (EE) in section 2523(b)--
                          (i) by striking ``(or his heirs or assigns) 
                        or such person (or his heirs or assigns)'' in 
                        paragraph (1) and inserting ``(or the donor's 
                        heirs or assigns) or such person (or such 
                        person's heirs or assigns)'';
                          (ii) by striking ``himself'' in paragraph (1) 
                        and inserting ``the donor's self'';
                          (iii) by striking ``he'' in paragraph (2) and 
                        inserting ``the donor''; and
                          (iv) by striking ``him'' each place it 
                        appears in the matter following paragraph (2) 
                        and inserting ``the donor'';
                  (FF) in section 2523(d), by striking ``himself'' and 
                inserting ``the donor's self'';
                  (GG) in section 2523(e), by striking ``his spouse'' 
                and inserting ``the donor's spouse'';
                  (HH) in section 3121(b)(3)--
                          (i) by striking ``his father'' in 
                        subparagraph (A) and inserting ``the child's 
                        father'';
                          (ii) by striking ``his father'' in 
                        subparagraph (B) and inserting ``the 
                        individual's father''; and
                          (iii) by striking ``his son'' in subparagraph 
                        (B) and inserting ``the individual's son'';
                  (II) in section 3306(c)(5)--
                          (i) by striking ``his son'' and inserting 
                        ``the individual's son''; and
                          (ii) by striking ``his father'' and inserting 
                        ``the child's father'';
                  (JJ) in section 3402(l)--
                          (i) by striking ``he'' each place it appears 
                        in paragraphs (2) and (3)(A) and inserting 
                        ``the employee''; and
                          (ii) by striking ``his taxable year'' both 
                        places it appears in paragraph (3)(B) and 
                        inserting ``the employee's taxable year'';
                  (KK) in section 4905(a), by striking ``his spouse'' 
                and inserting ``such person's spouse'';
                  (LL) in section 6046(c), by striking ``his'' both 
                places it appears and inserting ``the individual's'';
                  (MM) in section 6103(e)(1)(A)(ii), by striking 
                ``him'' and inserting ``the individual'';
                  (NN) in section 7448(a)(8), by striking ``his death'' 
                and inserting ``the individual's death'';
                  (OO) in subsections (d), (m), and (n) of section 
                7448, by striking ``his'' each place it appears and 
                inserting ``the individual's'';
                  (PP) in subsection (m) of section 7448, as so 
                amended, by striking ``he'' each place it appears and 
                inserting ``such judge or special trial judge''; and
                  (QQ) in section 7448(q)--
                          (i) by striking ``his'' both places it 
                        appears and inserting ``such judge's''; and
                          (ii) by striking ``to bring himself'' and 
                        inserting ``to come''.

                       I. SUMMARY AND BACKGROUND


                         A. Purpose and Summary

    The bill H.R. 3999, the Promoting Respect for Individuals' 
Dignity and Equality (PRIDE) Act of 2019, as ordered reported 
by the Committee on Ways and Means on June 20, 2019, amends the 
Internal Revenue Code of 1986 so as to provide lawfully married 
same-sex couples with the ability to file claims for credits 
and refunds related to a change in marital status back to their 
year of marriage, and to amend such code so that provisions 
that apply to married couples use gender-neutral language.

                 B. Background and Need for Legislation

    The Promoting Respect for Individuals' Dignity and Equality 
(PRIDE) Act of 2019 makes long-overdue changes to the tax code 
for same-sex married couples. June 28, 2019 is the 50th 
anniversary of the Stonewall riots. To commemorate that moment 
in the LGBTQ+ movement, the PRIDE Act scrubs the tax code of 
any gendered language related to married couples.
    Additionally, the legislation resolves a problem related to 
the mismatched timing of IRS guidance changes and state-level 
same-sex marriage legalization. Specifically, after the 2013 
Supreme Court ruling in United States v. Windsor, 570 U.S. 744 
(2013), the IRS updated its procedures to allow same-sex 
couples to amend old returns from 2010 onwards to reflect their 
marital status and claim overpayment credits for years they 
were married but unable to file jointly. H.R. 3299 allows same-
sex couples to file federal income tax adjustments back to the 
date of marriage providing additional relief for those couples 
who were lawfully married under state law before 2010.

                         C. Legislative History


Background

    H.R. 3299, the ``Promoting Respect for Individuals' Dignity 
and Equality Act of 2019,'' was introduced on June 18, 2019, 
and was referred to the Committee on Ways and Means.

Committee action

    The Committee on Ways and Means marked up H.R. 3299 on June 
20, 2019, and ordered the bill, as amended, favorably reported 
(with a quorum being present).

Committee hearings

    The Committee on Ways and Means heard testimony from Rep. 
Andy Levin on June 4, 2019 regarding H.R. 1244, the Equal 
Dignity for Married Taxpayers Act of 2019. Additionally, on 
June 4, 2019, the Committee heard testimony from Rep. Judy Chu 
regarding H.R. 3294, the Refund Equality Act of 2019. 
Provisions substantially similar to both H.R. 1244 and H.R. 
3294 are included in H.R. 3299.

                      II. EXPLANATION OF THE BILL


   A. Extension of Period of Limitation for Certain Legally Married 
         Couples (Sec. 2 of the Bill and Sec. 6511 of the Code)


                              PRESENT LAW

Statute of limitations on credit or refund

    In general, a taxpayer must file a claim for credit or 
refund within three years of the filing of the tax return or 
within two years of the payment of the tax, whichever expires 
later (if no tax return is filed, the two-year limit 
applies).\1\ A claim for credit or refund that is not filed 
within these time periods is rejected as untimely. In addition, 
the amount of credit or refund is limited to the portion of tax 
paid within the three-year period (plus any filing extension) 
or the two-year period, as applicable, immediately preceding 
the filing of the claim.\2\
---------------------------------------------------------------------------
    \1\Sec. 6511(a).
    \2\Sec. 6511(b)(2).
---------------------------------------------------------------------------

Limitation on filing a joint return after filing a separate return

    An individual filing a separate return for a tax year for 
which the individual and the individual's spouse could have 
filed a joint return may file a joint return amending the prior 
separate return for the tax year after the due date for filing 
the return has passed.\3\ However, an individual cannot elect 
to file a joint return after having filed a separate return 
more than three years after the due date of the return (without 
regard to any extensions) for the applicable tax year.\4\
---------------------------------------------------------------------------
    \3\Sec. 6013(b)(1).
    \4\Sec. 6013(b)(2).
---------------------------------------------------------------------------

Federal tax treatment of same-sex marriage

    Prior to the Supreme Court's decision in United States v. 
Windsor,\5\ section 3 of the Defense of Marriage Act (DOMA)\6\ 
prohibited the IRS from recognizing same-sex marriages for 
purposes of the provisions of the Code that refer to the 
marital status of the taxpayer and convey benefits upon such 
status. In Windsor, the Supreme Court held that section 3 of 
DOMA was unconstitutional because it violated principles of 
equal protection.
---------------------------------------------------------------------------
    \5\570 U.S. 744 (2013).
    \6\1 U.S.C. sec. 7.
---------------------------------------------------------------------------
    Following the Windsor decision, the IRS issued Revenue 
Ruling 2013-17\7\ (the ``Revenue Ruling''), which provided 
guidance on the effect of the Windsor decision on the IRS's 
interpretation of the provisions of the Code that refer to a 
taxpayer's marital status. In the Revenue Ruling, the IRS 
recognized the validity of same-sex marriages that were lawful 
in the State where they occurred. In particular, the Revenue 
Ruling made three specific holdings for Federal tax purposes:
---------------------------------------------------------------------------
    \7\2013-38 I.R.B. 201.
---------------------------------------------------------------------------
          1. The terms ``spouse,'' ``husband and wife,'' 
        ``husband,'' and ``wife'' include an individual married 
        to a person of the same sex if the individuals are 
        lawfully married under State law, and the term 
        ``marriage'' includes such a marriage between 
        individuals of the same sex.
          2. The IRS adopts a general rule recognizing a 
        marriage of same-sex individuals that was validly 
        entered into in a State whose laws authorize the 
        marriage of two individuals of the same sex even if the 
        married couple is domiciled in a State that does not 
        recognize the validity of same-sex marriages.
          3. The terms ``spouse,'' ``husband and wife,'' 
        ``husband,'' and ``wife'' do not include individuals 
        (whether of the opposite sex or the same sex) who have 
        entered into a registered domestic partnership, civil 
        union, or other similar formal relationship recognized 
        under State law that is not denominated as a marriage 
        under the laws of that State, and the term ``marriage'' 
        does not include such formal relationships.
    The holdings of Revenue Ruling 2013-17 were applied 
prospectively as of September 16, 2013. The Revenue Ruling 
allowed affected taxpayers to rely on the ruling for purposes 
of filing original returns, amended returns, adjusted returns, 
or claims for credit or refund resulting from its holdings but 
only if the applicable limitations period for filing such 
claims had not expired. Thus, taxpayers lawfully married under 
State law during tax years for which the statute of limitations 
was closed as of September 16, 2013, could not claim the tax 
benefits of Federal recognition of same-sex marriage. Among 
those that were affected were residents of Massachusetts and 
several other States that recognized same-sex marriage during 
years for which the statute of limitations generally was closed 
as of September 16, 2013.\8\ Accordingly, some lawfully married 
same-sex couples were not able to claim Federal tax benefits 
associated with their marital status for all tax years for 
which they were lawfully married.
---------------------------------------------------------------------------
    \8\The States that recognized same-sex marriage prior to 2010 (the 
years for which the statute of limitations would generally be closed 
for taxpayers amending their returns in calendar year 2013) are 
Massachusetts, California (during a portion of 2008), Connecticut, Iowa 
and Vermont.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that lawfully married same-sex 
couples should be entitled to the Federal tax benefits of their 
marital status for all years for which their marriages are 
recognized under State law. Although the Revenue Ruling 
provided limited relief for married same-sex couples, the IRS 
does not have the authority to allow claims for years for which 
the statute of limitations was closed. This provision provides 
full relief to married same-sex couples and ensures equal 
Federal tax treatment between same-sex married couples and 
other married couples for all applicable years.

                        EXPLANATION OF PROVISION

    Under the provision, lawfully married same-sex couples may 
file an amended return (including a joint return after filing a 
return other than a joint return\9\) and a claim for credit or 
refund relating to a change in marital status as a result of 
the holdings in Revenue Ruling 2013-17 for taxable years ending 
before September 16, 2013. The period for filing an amended 
return or claim for refund under the provision expires on the 
filing date (including extensions) of the return for the tax 
year that includes the date of enactment of the provision. In 
addition, the limitation on the dollar amounts recoverable is 
made inapplicable for newly-filed joint returns.
---------------------------------------------------------------------------
    \9\Because this legislation involves the novel situation of a 
retroactive change in the marital status of an individual for purpose 
of the Code, the provision clarifies that in applying section 6013(b) 
in this situation, the term ``separate return'' means any return other 
than a joint return. No inference is intended as the application of 
section 6013(b) in any other situation.
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

B. Rules Relating to All Legally Married Couples, and Rules Relating to 
        the Gender of Spouses, Etc. (Secs. 3 and 4 of the Bill)


                              PRESENT LAW

    The Code contains a number of provisions that apply to 
married couples. While these provisions apply to both opposite-
sex and same-sex married couples,\10\ they generally refer to 
``husband and wife'' or otherwise use gendered language in 
describing the couple or one or both spouses.
---------------------------------------------------------------------------
    \10\Rev. Rul. 2013-17. For a full description of Revenue Ruling 
2013-17, see discussion above.
---------------------------------------------------------------------------
    For example, the Code allows taxpayers to claim a 
nonrefundable child and dependent care credit, for which the 
allowable credit is an applicable percentage of employment-
related expenses. For purposes of this credit, qualifying 
expenses are limited by the earned income of the taxpayer. A 
special rule applies in the case of married couples:

          Section 21(d)(2). Special rule for spouse who is a 
        student or incapable of caring for himself. In the case 
        of a spouse who is a student or a qualifying individual 
        described in subsection (b)(1)(C), for purposes of the 
        paragraph (1), such spouse shall be deemed for each 
        month during which such spouse is a full-time student 
        at an educational institution, or is such a qualifying 
        individual, to be gainfully employed and to have earned 
        income of not less than--
          (A) $250 if subsection (c)(1) applies for the taxable 
        year, or
          (B) $500 if subsection (c)(2) applies for the taxable 
        year.
          In the case of any husband and wife, this paragraph 
        shall apply with respect to only one spouse for any one 
        month.

                           REASONS FOR CHANGE

    The Committee believes that the Code should be modernized 
to remove outdated references relating to marriage and replace 
them with gender-neutral terms. This provision ensures equal 
dignity for all taxpayers.

                       EXPLANATION OF PROVISIONS

    The provisions amend the Code so that provisions that apply 
to married couples use gender-neutral language, by changing 
terms such as ``husband and wife'' or other gendered language.
    For example, with respect to section 21(d)(2), quoted 
above, the provisions change ``himself'' to ``self'' and 
``husband and wife'' to ``any married couple.''

                             EFFECTIVE DATE

    The provisions are effective on the date of enactment.

                      III. VOTES OF THE COMMITTEE

    Pursuant to clause 3(b) of rule XIII of the Rules of the 
House of Representatives, the following statement is made 
concerning the vote of the Committee on Ways and Means during 
the markup consideration of H.R. 3299, the ``Promoting Respect 
for Individuals' Dignity and Equality Act of 2019'' on June 20, 
2019.
    The amendment in the nature of a substitute was agreed to 
by voice vote (with a quorum being present).
    The bill, H.R. 3299, as amended, was ordered favorably 
reported to the House of Representatives by voice vote (with a 
quorum being present).

                     IV. BUDGET EFFECTS OF THE BILL


               A. Committee Estimate of Budgetary Effects

    In compliance with clause 3(d) of rule XIII of the Rules of 
the House of Representatives, the following statement is made 
concerning the effects on the budget of the bill, H.R. 3299, as 
ordered reported.
    The bill is estimated to decrease Federal fiscal year 
budget receipts by $57 million dollars for the period 2019 
through 2029.

   ESTIMATED BUDGET EFFECTS OF H.R. 3299, THE ``PROMPTING RESPECT FOR INDIVIDUALS' DIGNITY AND EQUALITY ACT OF 2019,'' AS REPORTED BY THE COMMITTEE ON WAYS AND MEANS--Fiscal Years 2019-2029
                                                                                      [Millions of Dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
              Provision                       Effective           2019      2020      2021      2022      2023      2024      2025      2026      2027      2028      2029    2019- 24  2019- 29
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1. Extension of period of limitation   DOE....................       [1]       -57       [1]     - - -     - - -     - - -     - - -     - - -     - - -     - - -     - - -       -57       -57
 for certain legally married couples.
2. Rules relating to all legally       DOE....................  ........                                                     No Revenue Effect
 married couples.
3. Rules relating to the gender of     .......................                                                          No Revenue Effect
 spouses, etc..
                                      ----------------------------------------------------------------------------------------------------------------------------------------------------------
    NET TOTAL........................  .......................       [1]       -57       [1]       [2]       [2]       [2]       [2]       [2]       [2]       [2]       [2]       -57       -57
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Joint Committee on Taxation
----------------------
NOTE: Details may not add to totals due to rounding.
Legend for "Effective" column: DOE = date of enactment
[1]Loss of less than $500,000.
[2]No revenue effect.

B. Statement Regarding New Budget Authority and Tax Expenditures Budget 
                               Authority

    Pursuant to clause 3(c)(2) of rule XIII of the Rules of the 
House of Representatives, the Committee states that the bill 
involves no new or increased budget authority. The Committee 
further states that the bill involves no new tax expenditure.

      C. Cost Estimate Prepared by the Congressional Budget Office

    Pursuant to clause 3(c)(3) of rule XIII of the Rules of the 
House of Representatives, requiring a cost estimate prepared by 
CBO, the following statement by CBO is provided.

                                     U.S. Congress,
                               Congressional Budget Office,
                                     Washington, DC, June 25, 2019.
Hon. Richard Neal,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 3299, the 
Promoting Respect for Individuals' Dignity and Equality Act of 
2019.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Shannon Mok.
            Sincerely,
                                             Mark P. Hadley
                                 (For Phillip L. Swagel, Director).
    Enclosure.

    
    

    The bill would
           Extend the statute of limitations for 
        certain lawfully married same-sex couples to file 
        amended tax returns and claims for credit or refund
           Amend the Internal Revenue Code to use 
        gender-neutral language
    Estimated budgetary effects would primarily stem from
           A reduction in tax liability from filing a 
        joint return
    The Congressional Budget Act of 1974, as amended, 
stipulates that revenue estimates provided by the staff of the 
Joint Committee on Taxation (JCT) are the official estimates 
for all tax legislation considered by the Congress. CBO 
therefore incorporates such estimates into its cost estimates 
of the effects of legislation. All of the estimates for the 
provisions of H.R. 3299 were provided by JCT.
    Bill summary: H.R. 3299 would extend the statute of 
limitations for filing amended returns or claims for credit or 
refund for same-sex couples who were married prior to the 
federal recognition of same-sex marriage and for whom the 
statute of limitations had closed as of September 16, 2013. The 
extended statute of limitations would expire on the filing date 
(including extensions) of the return for the tax year in which 
the proposal is enacted. In addition, it would amend the 
Internal Revenue Code to use gender-neutral language in 
describing couples and spouses.
    Estimated Federal cost: The estimated budgetary effect of 
H.R. 3299 is shown in Table 1.

                                                   TABLE 1.--ESTIMATED BUDGETARY EFFECTS OF H.R. 3299
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                By fiscal year, millions of dollars--
                                           -------------------------------------------------------------------------------------------------------------
                                             2019    2020    2021    2022    2023    2024    2025    2026    2027    2028    2029   2019-2024  2019-2029
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                Decreases (-) in Revenues
 
Estimated Revenues........................       *     -57       *       0       0       0       0       0       0       0       0       -57        -57
 
                                                    Increases in the Deficit From Changes in Revenues
 
Effect on the Deficit.....................       *      57       *       0       0       0       0       0       0       0       0        57         57
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Staff of the Joint Committee on Taxation.
Components may not sum to totals because of rounding; * = between -$500,000 and $500,000.

    Basis of estimate: The Congressional Budget Act of 1974, as 
amended, stipulates that revenue estimates provided by the 
staff of the Joint Committee on Taxation (JCT) are the official 
estimates for all tax legislation considered by the Congress. 
CBO therefore incorporates such estimates into its cost 
estimates of the effects of legislation. All of the estimates 
for the provisions of H.R. 3299 were provided by JCT.\1\
---------------------------------------------------------------------------
    \1\For JCT's estimates of the provisions, which include detail 
beyond the summary presented below, see Joint Committee on Taxation, 
Estimated Revenue Effects of H.R. 3299, The ``Promoting Respect for 
Individuals' Dignity and Equality Act of 2019,'' JCX-27-19 (June 18, 
2019) https://go.usa.gov/xyCgv
---------------------------------------------------------------------------
    Revenues: On net, JCT estimates, enacting the bill would 
decrease revenues by $57 million over the 2019-2029 period.

     V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE


          A. Committee Oversight Findings and Recommendations

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee advises that the 
findings and recommendations of the Committee, based on 
oversight activities under clause 2(b)(1) of rule X of the 
Rules of the House of Representatives, are incorporated into 
the explanations of the provisions in this report.

        B. Statement of General Performance Goals and Objectives

    Pursuant to clause 3(c)(4) of rule XIII of the Rules of the 
House of Representatives, the Committee states that, because 
the bill contains no measure that authorizes funding, no 
statement of general performance goals and objectives is 
required.

              C. Information Relating to Unfunded Mandates

    Pursuant to section 423 of Public Law 104-4, the Unfunded 
Mandates Reform Act of 1995, the Committee has determined that 
the bill does not contain Federal mandates on the private 
sector. Further, the Committee has determined that the bill 
does not impose a Federal intergovernmental mandate on State, 
local, or tribal governments.

            D. Applicability of House Rule XXI, Clause 5(b)

    Clause 5(b) of rule XXI of the Rules of the House of 
Representatives provides, in part, that ``It shall not be in 
order to consider a bill, joint resolution, amendment, or 
conference report carrying a retroactive Federal income tax 
rate increase.'' The Committee, after careful review, states 
that the bill does not involve any retroactive Federal income 
tax rate increase within the meaning of the rule.

                       E. Tax Complexity Analysis

    Section 4022(b) of Public Law 105-206, the Internal Revenue 
Service Restructuring and Reform Act of 1998 (the ``RRA''), 
requires the staff of the Joint Committee on Taxation (in 
consultation with the Internal Revenue Service and the Treasury 
Department) to provide a tax complexity analysis. The 
complexity analysis is required for all legislation reported by 
the Senate Committee on Finance, the House Committee on Ways 
and Means, or any committee of conference if the legislation 
includes a provision that directly or indirectly amends the 
Internal Revenue Code of 1986 and has widespread applicability 
to individuals or small businesses.
    Pursuant to clause 3(h)(1) of rule XIII of the Rules of the 
House of Representatives, the staff of the Joint Committee on 
Taxation has determined that a complexity analysis is not 
required under section 4022(b) of the RRA because the bill 
contains no provision that amends the Internal Revenue Code of 
1986 and has ``widespread applicability'' to individuals or 
small businesses within the meaning of the rule.

  F. Congressional Earmarks, Limited Tax Benefits, and Limited Tariff 
                                Benefits

    With respect to clause 9 of rule XXI of the Rules of the 
House of Representatives, the Committee, after careful review, 
states that no provision of the bill contains any congressional 
earmark, limited tax benefit, or limited tariff benefit within 
the meaning of the rule.

                   G. Duplication of Federal Programs

    Pursuant to clause 3(c)(5) of rule XIII of the Rules of the 
House of Representatives, the Committee states that no 
provision of the bill establishes or reauthorizes: (1) a 
program of the Federal Government known to be duplicative of 
another Federal program, (2) a program included in any report 
from the Government Accountability Office to Congress pursuant 
to section 21 of Public Law 111-139, or (3) a program related 
to a program identified in the most recent Catalog of Federal 
Domestic Assistance, published pursuant to section 6104 of 
title 31, United States Code.

                              H. Hearings

    In compliance with Sec. 103(i) of H. Res. 6 (116th 
Congress) the following hearing was used to develop or consider 
H.R. 3299: House Ways and Means Committee Member Day Hearing 
held on June 4, 2019 during which Representative Andy Levin (D-
MI) and Representative Judy Chu (D-CA) testified regarding 
legislation that is incorporated into H.R. 3299.

              VI. CHANGES IN EXISTING LAW MADE BY THE BILL


            A. Changes in Existing Law Proposed by the Bill

    Pursuant to clause 3(e)(1)(B) of rule XIII of the Rules of 
the House of Representatives, changes in existing law proposed 
by the bill are shown as follows (existing law proposed to be 
omitted is enclosed in black brackets, new matter is printed in 
italics, existing law in which no change is proposed is shown 
in roman):

         Changes in Existing Law Made by the Bill, as Reported

  In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italics, and existing law in which no 
change is proposed is shown in roman):

                     INTERNAL REVENUE CODE OF 1986



           *       *       *       *       *       *       *
Subtitle A--Income Taxes

           *       *       *       *       *       *       *


CHAPTER 1--NORMAL TAXES AND SURTAXES

           *       *       *       *       *       *       *


Subchapter A--DETERMINATION OF TAX LIABILITY

           *       *       *       *       *       *       *


PART I--TAX ON INDIVIDUALS

           *       *       *       *       *       *       *


SEC. 1. TAX IMPOSED.

  (a) Married individuals filing joint returns and surviving 
spouses.--There is hereby imposed on the taxable income of--
          (1) every married individual (as defined in section 
        7703) who makes a single return jointly with [his 
        spouse] the individual's spouse under section 6013, and
          (2) every surviving spouse (as defined in section 
        2(a)),
a tax determined in accordance with the following table:
  (b) Heads of households.--There is hereby imposed on the 
taxable income of every head of a household (as defined in 
section 2(b)) a tax determined in accordance with the following 
table:
  (c) Unmarried individuals (other than surviving spouses and 
heads of households).--There is hereby imposed on the taxable 
income of every individual (other than a surviving spouse as 
defined in section 2(a) or the head of a household as defined 
in section 2(b)) who is not a married individual (as defined in 
section 7703) a tax determined in accordance with the following 
table:
  (d) Married individuals filing separate returns.--There is 
hereby imposed on the taxable income of every married 
individual (as defined in section 7703) who does not make a 
single return jointly with [his spouse] the individual's spouse 
under section 6013, a tax determined in accordance with the 
following table:
  (e) Estates and trusts.--There is hereby imposed on the 
taxable income of--
          (1) every estate, and
          (2) every trust,
taxable under this subsection a tax determined in accordance 
with the following table:
  (f) Phaseout of marriage penalty in 15-percent bracket; 
adjustments in tax tables so that inflation will not result in 
tax increases.--
          (1) In general.--Not later than December 15 of 1993, 
        and each subsequent calendar year, the Secretary shall 
        prescribe tables which shall apply in lieu of the 
        tables contained in subsections (a), (b), (c), (d), and 
        (e) with respect to taxable years beginning in the 
        succeeding calendar year.
          (2) Method of prescribing tables.--The table which 
        under paragraph (1) is to apply in lieu of the table 
        contained in subsection (a), (b), (c), (d), or (e), as 
        the case may be, with respect to taxable years 
        beginning in any calendar year shall be prescribed--
                  (A) except as provided in paragraph (8), by 
                increasing the minimum and maximum dollar 
                amounts for each bracket for which a tax is 
                imposed under such table by the cost-of-living 
                adjustment for such calendar year, determined--
                          (i) except as provided in clause 
                        (ii), by substituting ``1992'' for 
                        ``2016'' in paragraph (3)(A)(ii), and
                          (ii) in the case of adjustments to 
                        the dollar amounts at which the 36 
                        percent rate bracket begins or at which 
                        the 39.6 percent rate bracket begins, 
                        by substituting ``1993'' for ``2016'' 
                        in paragraph (3)(A)(ii),
                  (B) by not changing the rate applicable to 
                any rate bracket as adjusted under subparagraph 
                (A), and
                  (C) by adjusting the amounts setting forth 
                the tax to the extent necessary to reflect the 
                adjustments in the rate brackets.
          (3) Cost-of-living adjustment.--For purposes of this 
        subsection--
                  (A) In general.--The cost-of-living 
                adjustment for any calendar year is the 
                percentage (if any) by which--
                          (i) the C-CPI-U for the preceding 
                        calendar year, exceeds
                          (ii) the CPI for calendar year 2016, 
                        multiplied by the amount determined 
                        under subparagraph (B).
                  (B) Amount determined.--The amount determined 
                under this clause is the amount obtained by 
                dividing--
                          (i) the C-CPI-U for calendar year 
                        2016, by
                          (ii) the CPI for calendar year 2016.
                  (C) Special rule for adjustments with a base 
                year after 2016.--For purposes of any provision 
                of this title which provides for the 
                substitution of a year after 2016 for ``2016'' 
                in subparagraph (A)(ii), subparagraph (A) shall 
                be applied by substituting ``the C-CPI-U for 
                calendar year 2016'' for ``the CPI for calendar 
                year 2016'' and all that follows in clause (ii) 
                thereof.
          (4) CPI for any calendar year.--For purposes of 
        paragraph (3), the CPI for any calendar year is the 
        average of the Consumer Price Index as of the close of 
        the 12-month period ending on August 31 of such 
        calendar year.
          (5) Consumer Price Index.--For purposes of paragraph 
        (4), the term ``Consumer Price Index'' means the last 
        Consumer Price Index for all-urban consumers published 
        by the Department of Labor. For purposes of the 
        preceding sentence, the revision of the Consumer Price 
        Index which is most consistent with the Consumer Price 
        Index for calendar year 1986 shall be used.
          (6) C-CPI-U.--For purposes of this subsection--
                  (A) In general.--The term ``C-CPI-U'' means 
                the Chained Consumer Price Index for All Urban 
                Consumers (as published by the Bureau of Labor 
                Statistics of the Department of Labor). The 
                values of the Chained Consumer Price Index for 
                All Urban Consumers taken into account for 
                purposes of determining the cost-of-living 
                adjustment for any calendar year under this 
                subsection shall be the latest values so 
                published as of the date on which such Bureau 
                publishes the initial value of the Chained 
                Consumer Price Index for All Urban Consumers 
                for the month of August for the preceding 
                calendar year.
                  (B) Determination for calendar year.--The C-
                CPI-U for any calendar year is the average of 
                the C-CPI-U as of the close of the 12-month 
                period ending on August 31 of such calendar 
                year.
          (7) Rounding.--
                  (A) In general.--If any increase determined 
                under paragraph (2)(A), section 63(c)(4), 
                section 68(b)(2) or section 151(d)(4) is not a 
                multiple of $50, such increase shall be rounded 
                to the next lowest multiple of $50.
                  (B) Table for married individuals filing 
                separately.--In the case of a married 
                individual filing a separate return, 
                subparagraph (A) (other than with respect to 
                sections 63(c)(4) and 151(d)(4)(A)) shall be 
                applied by substituting ``$25'' for ``$50'' 
                each place it appears.
          (8) Elimination of marriage penalty in 15-percent 
        bracket.--With respect to taxable years beginning after 
        December 31, 2003, in prescribing the tables under 
        paragraph (1)--
                  (A) the maximum taxable income in the 15-
                percent rate bracket in the table contained in 
                subsection (a) (and the minimum taxable income 
                in the next higher taxable income bracket in 
                such table) shall be 200 percent of the maximum 
                taxable income in the 15-percent rate bracket 
                in the table contained in subsection (c) (after 
                any other adjustment under this subsection), 
                and
                  (B) the comparable taxable income amounts in 
                the table contained in subsection (d) shall be 
                1/2 of the amounts determined under 
                subparagraph (A).
  (g) Certain unearned income of children taxed as if parent's 
income.--
          (1) In general.--In the case of any child to whom 
        this subsection applies, the tax imposed by this 
        section shall be equal to the greater of--
                  (A) the tax imposed by this section without 
                regard to this subsection, or
                  (B) the sum of--
                          (i) the tax which would be imposed by 
                        this section if the taxable income of 
                        such child for the taxable year were 
                        reduced by the net unearned income of 
                        such child, plus
                          (ii) such child's share of the 
                        allocable parental tax.
          (2) Child to whom subsection applies.--This 
        subsection shall apply to any child for any taxable 
        year if--
                  (A) such child--
                          (i) has not attained age 18 before 
                        the close of the taxable year, or
                          (ii)(I) has attained age 18 before 
                        the close of the taxable year and meets 
                        the age requirements of section 
                        152(c)(3) (determined without regard to 
                        subparagraph (B) thereof), and
                          (II) whose earned income (as defined 
                        in section 911(d)(2)) for such taxable 
                        year does not exceed one-half of the 
                        amount of the individual's support 
                        (within the meaning of section 
                        152(c)(1)(D) after the application of 
                        section 152(f)(5) (without regard to 
                        subparagraph (A) thereof)) for such 
                        taxable year,
                  (B) either parent of such child is alive at 
                the close of the taxable year, and
                  (C) such child does not file a joint return 
                for the taxable year.
          (3) Allocable parental tax.--For purposes of this 
        subsection--
                  (A) In general.--The term ``allocable 
                parental tax'' means the excess of--
                          (i) the tax which would be imposed by 
                        this section on the parent's taxable 
                        income if such income included the net 
                        unearned income of all children of the 
                        parent to whom this subsection applies, 
                        over
                          (ii) the tax imposed by this section 
                        on the parent without regard to this 
                        subsection.
                For purposes of clause (i), net unearned income 
                of all children of the parent shall not be 
                taken into account in computing any exclusion, 
                deduction, or credit of the parent.
                  (B) Child's share.--A child's share of any 
                allocable parental tax of a parent shall be 
                equal to an amount which bears the same ratio 
                to the total allocable parental tax as the 
                child's net unearned income bears to the 
                aggregate net unearned income of all children 
                of such parent to whom this subsection applies.
                  (C) Special rule where parent has different 
                taxable year.--Except as provided in 
                regulations, if the parent does not have the 
                same taxable year as the child, the allocable 
                parental tax shall be determined on the basis 
                of the taxable year of the parent ending in the 
                child's taxable year.
          (4) Net unearned income.--For purposes of this 
        subsection--
                  (A) In general.--The term ``net unearned 
                income'' means the excess of--
                          (i) the portion of the adjusted gross 
                        income for the taxable year which is 
                        not attributable to earned income (as 
                        defined in section 911(d)(2)), over
                          (ii) the sum of--
                                  (I) the amount in effect for 
                                the taxable year under section 
                                63(c)(5)(A) (relating to 
                                limitation on standard 
                                deduction in the case of 
                                certain dependents), plus
                                  (II) the greater of the 
                                amount described in subclause 
                                (I) or, if the child itemizes 
                                his deductions for the taxable 
                                year, the amount of the 
                                itemized deductions allowed by 
                                this chapter for the taxable 
                                year which are directly 
                                connected with the production 
                                of the portion of adjusted 
                                gross income referred to in 
                                clause (i).
                  (B) Limitation based on taxable income.--The 
                amount of the net unearned income for any 
                taxable year shall not exceed the individual's 
                taxable income for such taxable year.
                  (C) Treatment of distributions from qualified 
                disability trusts.--For purposes of this 
                subsection, in the case of any child who is a 
                beneficiary of a qualified disability trust (as 
                defined in section 642(b)(2)(C)(ii)), any 
                amount included in the income of such child 
                under sections 652 and 662 during a taxable 
                year shall be considered earned income of such 
                child for such taxable year.
          (5) Special rules for determining parent to whom 
        subsection applies.--For purposes of this subsection, 
        the parent whose taxable income shall be taken into 
        account shall be--
                  (A) in the case of parents who are not 
                married (within the meaning of section 7703), 
                the custodial parent (within the meaning of 
                section 152(e)) of the child, and
                  (B) in the case of married individuals filing 
                separately, the individual with the greater 
                taxable income.
          (6) Providing of parent's TIN.--The parent of any 
        child to whom this subsection applies for any taxable 
        year shall provide the TIN of such parent to such child 
        and such child shall include such TIN on the child's 
        return of tax imposed by this section for such taxable 
        year.
          (7) Election to claim certain unearned income of 
        child on parent's return.--
                  (A) In general.--If--
                          (i) any child to whom this subsection 
                        applies has gross income for the 
                        taxable year only from interest and 
                        dividends (including Alaska Permanent 
                        Fund dividends),
                          (ii) such gross income is more than 
                        the amount described in paragraph 
                        (4)(A)(ii)(I) and less than 10 times 
                        the amount so described,
                          (iii) no estimated tax payments for 
                        such year are made in the name and TIN 
                        of such child, and no amount has been 
                        deducted and withheld under section 
                        3406, and
                          (iv) the parent of such child (as 
                        determined under paragraph (5)) elects 
                        the application of subparagraph (B),
                such child shall be treated (other than for 
                purposes of this paragraph) as having no gross 
                income for such year and shall not be required 
                to file a return under section 6012.
                  (B) Income included on parent's return.--In 
                the case of a parent making the election under 
                this paragraph--
                          (i) the gross income of each child to 
                        whom such election applies (to the 
                        extent the gross income of such child 
                        exceeds twice the amount described in 
                        paragraph (4)(A)(ii)(I)) shall be 
                        included in such parent's gross income 
                        for the taxable year,
                          (ii) the tax imposed by this section 
                        for such year with respect to such 
                        parent shall be the amount equal to the 
                        sum of--
                                  (I) the amount determined 
                                under this section after the 
                                application of clause (i), plus
                                  (II) for each such child, 10 
                                percent of the lesser of the 
                                amount described in paragraph 
                                (4)(A)(ii)(I) or the excess of 
                                the gross income of such child 
                                over the amount so described, 
                                and
                          (iii) any interest which is an item 
                        of tax preference under section 
                        57(a)(5) of the child shall be treated 
                        as an item of tax preference of such 
                        parent (and not of such child).
                  (C) Regulations.--The Secretary shall 
                prescribe such regulations as may be necessary 
                or appropriate to carry out the purposes of 
                this paragraph.
  (h) Maximum capital gains rate.--
          (1) In general.--If a taxpayer has a net capital gain 
        for any taxable year, the tax imposed by this section 
        for such taxable year shall not exceed the sum of--
                  (A) a tax computed at the rates and in the 
                same manner as if this subsection had not been 
                enacted on the greater of--
                          (i) taxable income reduced by the net 
                        capital gain; or
                          (ii) the lesser of--
                                  (I) the amount of taxable 
                                income taxed at a rate below 25 
                                percent; or
                                  (II) taxable income reduced 
                                by the adjusted net capital 
                                gain;
                  (B) 0 percent of so much of the adjusted net 
                capital gain (or, if less, taxable income) as 
                does not exceed the excess (if any) of--
                          (i) the amount of taxable income 
                        which would (without regard to this 
                        paragraph) be taxed at a rate below 25 
                        percent, over
                          (ii) the taxable income reduced by 
                        the adjusted net capital gain;
                  (C) 15 percent of the lesser of--
                          (i) so much of the adjusted net 
                        capital gain (or, if less, taxable 
                        income) as exceeds the amount on which 
                        a tax is determined under subparagraph 
                        (B), or
                          (ii) the excess of--
                                  (I) the amount of taxable 
                                income which would (without 
                                regard to this paragraph) be 
                                taxed at a rate below 39.6 
                                percent, over
                                  (II) the sum of the amounts 
                                on which a tax is determined 
                                under subparagraphs (A) and 
                                (B),
                  (D) 20 percent of the adjusted net capital 
                gain (or, if less, taxable income) in excess of 
                the sum of the amounts on which tax is 
                determined under subparagraphs (B) and (C),
                  (E) 25 percent of the excess (if any) of--
                          (i) the unrecaptured section 1250 
                        gain (or, if less, the net capital gain 
                        (determined without regard to paragraph 
                        (11))), over
                          (ii) the excess (if any) of--
                                  (I) the sum of the amount on 
                                which tax is determined under 
                                subparagraph (A) plus the net 
                                capital gain, over
                                  (II) taxable income; and
                  (F) 28 percent of the amount of taxable 
                income in excess of the sum of the amounts on 
                which tax is determined under the preceding 
                subparagraphs of this paragraph.
          (2) Net capital gain taken into account as investment 
        income.--For purposes of this subsection, the net 
        capital gain for any taxable year shall be reduced (but 
        not below zero) by the amount which the taxpayer takes 
        into account as investment income under section 
        163(d)(4)(B)(iii).
          (3) Adjusted net capital gain.--For purposes of this 
        subsection, the term ``adjusted net capital gain'' 
        means the sum of--
                  (A) net capital gain (determined without 
                regard to paragraph (11)) reduced (but not 
                below zero) by the sum of--
                          (i) unrecaptured section 1250 gain, 
                        and
                          (ii) 28-percent rate gain, plus
                  (B) qualified dividend income (as defined in 
                paragraph (11)).
          (4) 28-percent rate gain.--For purposes of this 
        subsection, the term ``28-percent rate gain'' means the 
        excess (if any) of--
                  (A) the sum of--
                          (i) collectibles gain; and
                          (ii) section 1202 gain, over
                  (B) the sum of--
                          (i) collectibles loss;
                          (ii) the net short-term capital loss; 
                        and
                          (iii) the amount of long-term capital 
                        loss carried under section 
                        1212(b)(1)(B) to the taxable year.
          (5) Collectibles gain and loss.--For purposes of this 
        subsection--
                  (A) In general.--The terms ``collectibles 
                gain'' and ``collectibles loss'' mean gain or 
                loss (respectively) from the sale or exchange 
                of a collectible (as defined in section 408(m) 
                without regard to paragraph (3) thereof) which 
                is a capital asset held for more than 1 year 
                but only to the extent such gain is taken into 
                account in computing gross income and such loss 
                is taken into account in computing taxable 
                income.
                  (B) Partnerships, etc..--For purposes of 
                subparagraph (A), any gain from the sale of an 
                interest in a partnership, S corporation, or 
                trust which is attributable to unrealized 
                appreciation in the value of collectibles shall 
                be treated as gain from the sale or exchange of 
                a collectible. Rules similar to the rules of 
                section 751 shall apply for purposes of the 
                preceding sentence.
          (6) Unrecaptured section 1250 gain.--For purposes of 
        this subsection--
                  (A) In general.--The term ``unrecaptured 
                section 1250 gain'' means the excess (if any) 
                of--
                          (i) the amount of long-term capital 
                        gain (not otherwise treated as ordinary 
                        income) which would be treated as 
                        ordinary income if section 1250(b)(1) 
                        included all depreciation and the 
                        applicable percentage under section 
                        1250(a) were 100 percent, over
                          (ii) the excess (if any) of--
                                  (I) the amount described in 
                                paragraph (4)(B); over
                                  (II) the amount described in 
                                paragraph (4)(A).
                  (B) Limitation with respect to section 1231 
                property.--The amount described in subparagraph 
                (A)(i) from sales, exchanges, and conversions 
                described in section 1231(a)(3)(A) for any 
                taxable year shall not exceed the net section 
                1231 gain (as defined in section 1231(c)(3)) 
                for such year.
          (7) Section 1202 gain.--For purposes of this 
        subsection, the term ``section 1202 gain'' means the 
        excess of--
                  (A) the gain which would be excluded from 
                gross income under section 1202 but for the 
                percentage limitation in section 1202(a), over
                  (B) the gain excluded from gross income under 
                section 1202.
          (8) Coordination with recapture of net ordinary 
        losses under section 1231.--If any amount is treated as 
        ordinary income under section 1231(c), such amount 
        shall be allocated among the separate categories of net 
        section 1231 gain (as defined in section 1231(c)(3)) in 
        such manner as the Secretary may by forms or 
        regulations prescribe.
          (9) Regulations.--The Secretary may prescribe such 
        regulations as are appropriate (including regulations 
        requiring reporting) to apply this subsection in the 
        case of sales and exchanges by pass-thru entities and 
        of interests in such entities.
          (10) Pass-thru entity defined.--For purposes of this 
        subsection, the term ``pass-thru entity'' means--
                  (A) a regulated investment company;
                  (B) a real estate investment trust;
                  (C) an S corporation;
                  (D) a partnership;
                  (E) an estate or trust;
                  (F) a common trust fund; and
                  (G) a qualified electing fund (as defined in 
                section 1295).
          (11) Dividends taxed as net capital gain.--
                  (A) In general.--For purposes of this 
                subsection, the term ``net capital gain'' means 
                net capital gain (determined without regard to 
                this paragraph) increased by qualified dividend 
                income.
                  (B) Qualified dividend income.--For purposes 
                of this paragraph--
                          (i) In general.--The term ``qualified 
                        dividend income'' means dividends 
                        received during the taxable year from--
                                  (I) domestic corporations, 
                                and
                                  (II) qualified foreign 
                                corporations.
                          (ii) Certain dividends excluded.--
                        Such term shall not include--
                                  (I) any dividend from a 
                                corporation which for the 
                                taxable year of the corporation 
                                in which the distribution is 
                                made, or the preceding taxable 
                                year, is a corporation exempt 
                                from tax under section 501 or 
                                521,
                                  (II) any amount allowed as a 
                                deduction under section 591 
                                (relating to deduction for 
                                dividends paid by mutual 
                                savings banks, etc.), and
                                  (III) any dividend described 
                                in section 404(k).
                          (iii) Coordination with section 
                        246(c).--Such term shall not include 
                        any dividend on any share of stock--
                                  (I) with respect to which the 
                                holding period requirements of 
                                section 246(c) are not met 
                                (determined by substituting in 
                                section 246(c) ``60 days'' for 
                                ``45 days'' each place it 
                                appears and by substituting 
                                ``121-day period'' for ``91-day 
                                period''), or
                                  (II) to the extent that the 
                                taxpayer is under an obligation 
                                (whether pursuant to a short 
                                sale or otherwise) to make 
                                related payments with respect 
                                to positions in substantially 
                                similar or related property.
                  (C) Qualified foreign corporations.--
                          (i) In general.--Except as otherwise 
                        provided in this paragraph, the term 
                        ``qualified foreign corporation'' means 
                        any foreign corporation if--
                                  (I) such corporation is 
                                incorporated in a possession of 
                                the United States, or
                                  (II) such corporation is 
                                eligible for benefits of a 
                                comprehensive income tax treaty 
                                with the United States which 
                                the Secretary determines is 
                                satisfactory for purposes of 
                                this paragraph and which 
                                includes an exchange of 
                                information program.
                          (ii) Dividends on stock readily 
                        tradable on United States securities 
                        market.--A foreign corporation not 
                        otherwise treated as a qualified 
                        foreign corporation under clause (i) 
                        shall be so treated with respect to any 
                        dividend paid by such corporation if 
                        the stock with respect to which such 
                        dividend is paid is readily tradable on 
                        an established securities market in the 
                        United States.
                          (iii) Exclusion of dividends of 
                        certain foreign corporations.--Such 
                        term shall not include--
                                  (I) any foreign corporation 
                                which for the taxable year of 
                                the corporation in which the 
                                dividend was paid, or the 
                                preceding taxable year, is a 
                                passive foreign investment 
                                company (as defined in section 
                                1297), and
                                  (II) any corporation which 
                                first becomes a surrogate 
                                foreign corporation (as defined 
                                in section 7874(a)(2)(B)) after 
                                the date of the enactment of 
                                this subclause, other than a 
                                foreign corporation which is 
                                treated as a domestic 
                                corporation under section 
                                7874(b).
                          (iv) Coordination with foreign tax 
                        credit limitation.--Rules similar to 
                        the rules of section 904(b)(2)(B) shall 
                        apply with respect to the dividend rate 
                        differential under this paragraph.
                  (D) Special rules.--
                          (i) Amounts taken into account as 
                        investment income.--Qualified dividend 
                        income shall not include any amount 
                        which the taxpayer takes into account 
                        as investment income under section 
                        163(d)(4)(B).
                          (ii) Extraordinary dividends.--If a 
                        taxpayer to whom this section applies 
                        receives, with respect to any share of 
                        stock, qualified dividend income from 1 
                        or more dividends which are 
                        extraordinary dividends (within the 
                        meaning of section 1059(c)), any loss 
                        on the sale or exchange of such share 
                        shall, to the extent of such dividends, 
                        be treated as long-term capital loss.
                          (iii) Treatment of dividends from 
                        regulated investment companies and real 
                        estate investment trusts.--A dividend 
                        received from a regulated investment 
                        company or a real estate investment 
                        trust shall be subject to the 
                        limitations prescribed in sections 854 
                        and 857.
  (i) Rate reductions after 2000.--
          (1) 10-percent rate bracket.--
                  (A) In general.--In the case of taxable years 
                beginning after December 31, 2000--
                          (i) the rate of tax under subsections 
                        (a), (b), (c), and (d) on taxable 
                        income not over the initial bracket 
                        amount shall be 10 percent, and
                          (ii) the 15 percent rate of tax shall 
                        apply only to taxable income over the 
                        initial bracket amount but not over the 
                        maximum dollar amount for the 15-
                        percent rate bracket.
                  (B) Initial bracket amount.--For purposes of 
                this paragraph, the initial bracket amount is--
                          (i) $14,000 in the case of subsection 
                        (a),
                          (ii) $10,000 in the case of 
                        subsection (b), and
                          (iii) 1/2 the amount applicable under 
                        clause (i) (after adjustment, if any, 
                        under subparagraph (C)) in the case of 
                        subsections (c) and (d).
                  (C) Inflation adjustment.--In prescribing the 
                tables under subsection (f) which apply with 
                respect to taxable years beginning in calendar 
                years after 2003--
                          (i) the cost-of-living adjustment 
                        shall be determined under subsection 
                        (f)(3) by substituting ``2002'' for 
                        ``2016'' in subparagraph (A)(ii) 
                        thereof, and
                          (ii) the adjustments under clause (i) 
                        shall not apply to the amount referred 
                        to in subparagraph (B)(iii).
                If any amount after adjustment under the 
                preceding sentence is not a multiple of $50, 
                such amount shall be rounded to the next lowest 
                multiple of $50.
          (2) 25-, 28-, and 33-percent rate brackets.--The 
        tables under subsections (a), (b), (c), (d), and (e) 
        shall be applied--
                  (A) by substituting ``25%'' for ``28%'' each 
                place it appears (before the application of 
                subparagraph (B)),
                  (B) by substituting ``28%'' for ``31%'' each 
                place it appears, and
                  (C) by substituting ``33%'' for ``36%'' each 
                place it appears.
          (3) Modifications to income tax brackets for high-
        income taxpayers.--
                  (A) 35-percent rate bracket.--In the case of 
                taxable years beginning after December 31, 
                2012--
                          (i) the rate of tax under subsections 
                        (a), (b), (c), and (d) on a taxpayer's 
                        taxable income in the highest rate 
                        bracket shall be 35 percent to the 
                        extent such income does not exceed an 
                        amount equal to the excess of--
                                  (I) the applicable threshold, 
                                over
                                  (II) the dollar amount at 
                                which such bracket begins, and
                          (ii) the 39.6 percent rate of tax 
                        under such subsections shall apply only 
                        to the taxpayer's taxable income in 
                        such bracket in excess of the amount to 
                        which clause (i) applies.
                  (B) Applicable threshold.--For purposes of 
                this paragraph, the term ``applicable 
                threshold'' means--
                          (i) $450,000 in the case of 
                        subsection (a),
                          (ii) $425,000 in the case of 
                        subsection (b),
                          (iii) $400,000 in the case of 
                        subsection (c), and
                          (iv) 1/2 the amount applicable under 
                        clause (i) (after adjustment, if any, 
                        under subparagraph (C)) in the case of 
                        subsection (d).
                  (C) Inflation adjustment.--For purposes of 
                this paragraph, with respect to taxable years 
                beginning in calendar years after 2013, each of 
                the dollar amounts under clauses (i), (ii), and 
                (iii) of subparagraph (B) shall be adjusted in 
                the same manner as under paragraph (1)(C)(i), 
                except that subsection (f)(3)(A)(ii) shall be 
                applied by substituting ``2012'' for ``2016''.
          (4) Adjustment of tables.--The Secretary shall adjust 
        the tables prescribed under subsection (f) to carry out 
        this subsection.
  (j) Modifications for taxable years 2018 through 2025.--
          (1) In general.--In the case of a taxable year 
        beginning after December 31, 2017, and before January 
        1, 2026--
                  (A) subsection (i) shall not apply, and
                  (B) this section (other than subsection (i)) 
                shall be applied as provided in paragraphs (2) 
                through (6).
          (2) Rate tables.--
                  (A) Married individuals filing joint returns 
                and surviving spouses.--The following table 
                shall be applied in lieu of the table contained 
                in subsection (a):
                  (B) Heads of households.--The following table 
                shall be applied in lieu of the table contained 
                in subsection (b):
                  (C) Unmarried individuals other than 
                surviving spouses and heads of households.--The 
                following table shall be applied in lieu of the 
                table contained in subsection (c):
                  (D) Married individuals filing separate 
                returns.--The following table shall be applied 
                in lieu of the table contained in subsection 
                (d):
                  (E) Estates and trusts.--The following table 
                shall be applied in lieu of the table contained 
                in subsection (e):
                  (F) References to rate tables.--Any reference 
                in this title to a rate of tax under subsection 
                (c) shall be treated as a reference to the 
                corresponding rate bracket under subparagraph 
                (C) of this paragraph, except that the 
                reference in section 3402(q)(1) to the third 
                lowest rate of tax applicable under subsection 
                (c) shall be treated as a reference to the 
                fourth lowest rate of tax under subparagraph 
                (C).
          (3) Adjustments.--
                  (A) No adjustment in 2018.--The tables 
                contained in paragraph (2) shall apply without 
                adjustment for taxable years beginning after 
                December 31, 2017, and before January 1, 2019.
                  (B) Subsequent years.--For taxable years 
                beginning after December 31, 2018, the 
                Secretary shall prescribe tables which shall 
                apply in lieu of the tables contained in 
                paragraph (2) in the same manner as under 
                paragraphs (1) and (2) of subsection (f) 
                (applied without regard to clauses (i) and (ii) 
                of subsection (f)(2)(A)), except that in 
                prescribing such tables--
                          (i) subsection (f)(3) shall be 
                        applied by substituting ``calendar year 
                        2017'' for ``calendar year 2016'' in 
                        subparagraph (A)(ii) thereof,
                          (ii) subsection (f)(7)(B) shall apply 
                        to any unmarried individual other than 
                        a surviving spouse or head of 
                        household, and
                          (iii) subsection (f)(8) shall not 
                        apply.
          (4) Special rules for certain children with unearned 
        income.--
                  (A) In general.--In the case of a child to 
                whom subsection (g) applies for the taxable 
                year, the rules of subparagraphs (B) and (C) 
                shall apply in lieu of the rule under 
                subsection (g)(1).
                  (B) Modifications to applicable rate 
                brackets.--In determining the amount of tax 
                imposed by this section for the taxable year on 
                a child described in subparagraph (A), the 
                income tax table otherwise applicable under 
                this subsection to the child shall be applied 
                with the following modifications:
                          (i) 24-percent bracket.--The maximum 
                        taxable income which is taxed at a rate 
                        below 24 percent shall not be more than 
                        the sum of--
                                  (I) the earned taxable income 
                                of such child, plus
                                  (II) the minimum taxable 
                                income for the 24-percent 
                                bracket in the table under 
                                paragraph (2)(E) (as adjusted 
                                under paragraph (3)) for the 
                                taxable year.
                          (ii) 35-percent bracket.--The maximum 
                        taxable income which is taxed at a rate 
                        below 35 percent shall not be more than 
                        the sum of--
                                  (I) the earned taxable income 
                                of such child, plus
                                  (II) the minimum taxable 
                                income for the 35-percent 
                                bracket in the table under 
                                paragraph (2)(E) (as adjusted 
                                under paragraph (3)) for the 
                                taxable year.
                          (iii) 37-percent bracket.--The 
                        maximum taxable income which is taxed 
                        at a rate below 37 percent shall not be 
                        more than the sum of--
                                  (I) the earned taxable income 
                                of such child, plus
                                  (II) the minimum taxable 
                                income for the 37-percent 
                                bracket in the table under 
                                paragraph (2)(E) (as adjusted 
                                under paragraph (3)) for the 
                                taxable year.
                  (C) Coordination with capital gains rates.--
                For purposes of applying section 1(h) (after 
                the modifications under paragraph (5)(A))--
                          (i) the maximum zero rate amount 
                        shall not be more than the sum of--
                                  (I) the earned taxable income 
                                of such child, plus
                                  (II) the amount in effect 
                                under paragraph (5)(B)(i)(IV) 
                                for the taxable year, and
                          (ii) the maximum 15-percent rate 
                        amount shall not be more than the sum 
                        of--
                                  (I) the earned taxable income 
                                of such child, plus
                                  (II) the amount in effect 
                                under paragraph (5)(B)(ii)(IV) 
                                for the taxable year.
                  (D) Earned taxable income.--For purposes of 
                this paragraph, the term ``earned taxable 
                income'' means, with respect to any child for 
                any taxable year, the taxable income of such 
                child reduced (but not below zero) by the net 
                unearned income (as defined in subsection 
                (g)(4)) of such child.
          (5) Application of current income tax brackets to 
        capital gains brackets.--
                  (A) In general.--Section 1(h)(1) shall be 
                applied--
                          (i) by substituting ``below the 
                        maximum zero rate amount'' for ``which 
                        would (without regard to this 
                        paragraph) be taxed at a rate below 25 
                        percent'' in subparagraph (B)(i), and
                          (ii) by substituting ``below the 
                        maximum 15-percent rate amount'' for 
                        ``which would (without regard to this 
                        paragraph) be taxed at a rate below 
                        39.6 percent'' in subparagraph 
                        (C)(ii)(I).
                  (B) Maximum amounts defined.--For purposes of 
                applying section 1(h) with the modifications 
                described in subparagraph (A)--
                          (i) Maximum zero rate amount.--The 
                        maximum zero rate amount shall be--
                                  (I) in the case of a joint 
                                return or surviving spouse, 
                                $77,200,
                                  (II) in the case of an 
                                individual who is a head of 
                                household (as defined in 
                                section 2(b)), $51,700,
                                  (III) in the case of any 
                                other individual (other than an 
                                estate or trust), an amount 
                                equal to 1/2 of the amount in 
                                effect for the taxable year 
                                under subclause (I), and
                                  (IV) in the case of an estate 
                                or trust, $2,600.
                          (ii) Maximum 15-percent rate 
                        amount.--The maximum 15-percent rate 
                        amount shall be--
                                  (I) in the case of a joint 
                                return or surviving spouse, 
                                $479,000 (1/2 such amount in 
                                the case of a married 
                                individual filing a separate 
                                return),
                                  (II) in the case of an 
                                individual who is the head of a 
                                household (as defined in 
                                section 2(b)), $452,400,
                                  (III) in the case of any 
                                other individual (other than an 
                                estate or trust), $425,800, and
                                  (IV) in the case of an estate 
                                or trust, $12,700.
                  (C) Inflation adjustment.--In the case of any 
                taxable year beginning after 2018, each of the 
                dollar amounts in clauses (i) and (ii) of 
                subparagraph (B) shall be increased by an 
                amount equal to--
                          (i) such dollar amount, multiplied by
                          (ii) the cost-of-living adjustment 
                        determined under subsection (f)(3) for 
                        the calendar year in which the taxable 
                        year begins, determined by substituting 
                        ``calendar year 2017'' for ``calendar 
                        year 2016'' in subparagraph (A)(ii) 
                        thereof.
                If any increase under this subparagraph is not 
                a multiple of $50, such increase shall be 
                rounded to the next lowest multiple of $50.
          (6) Section 15 not to apply.--Section 15 shall not 
        apply to any change in a rate of tax by reason of this 
        subsection.

SEC. 2. DEFINITIONS AND SPECIAL RULES.

  (a) Definition of surviving spouse.--
          (1) In general.--For purposes of section 1, the term 
        ``surviving spouse'' means a taxpayer--
                  (A) whose spouse died during either of [his 
                two taxable years] the taxpayer's two taxable 
                years immediately preceding the taxable year, 
                and
                  (B) who maintains as [his home] the 
                taxpayer's home a household which constitutes 
                for the taxable year the principal place of 
                abode (as a member of such household) of a 
                dependent (i) who (within the meaning of 
                section 152, determined without regard to 
                subsections (b)(1), (b)(2), and (d)(1)(B) 
                thereof) is a son, stepson, daughter, or 
                stepdaughter of the taxpayer, and (ii) with 
                respect to whom the taxpayer is entitled to a 
                deduction for the taxable year under section 
                151.
        For purposes of this paragraph, an individual shall be 
        considered as maintaining a household only if over half 
        of the cost of maintaining the household during the 
        taxable year is furnished by such individual.
          (2) Limitations.--Notwithstanding paragraph (1), for 
        purposes of section 1 a taxpayer shall not be 
        considered to be a surviving spouse--
                  (A) if the taxpayer has remarried at any time 
                before the close of the taxable year, or
                  (B) unless, for the taxpayer's taxable year 
                during which [his spouse] the taxpayer's spouse 
                died, a joint return could have been made under 
                the provisions of section 6013 (without regard 
                to subsection (a)(3) thereof).
          (3) Special rule where deceased spouse was in missing 
        status.--If an individual was in a missing status 
        (within the meaning of section 6013(f)(3)) as a result 
        of service in a combat zone (as determined for purposes 
        of section 112) and if such individual remains in such 
        status until the date referred to in subparagraph (A) 
        or (B), then, for purposes of paragraph (1)(A), the 
        date on which such individual died shall be treated as 
        the earlier of the date determined under subparagraph 
        (A) or the date determined under subparagraph (B):
                  (A) the date on which the determination is 
                made under section 556 of title 37 of the 
                United States Code or under section 5566 of 
                title 5 of such Code (whichever is applicable) 
                that such individual died while in such missing 
                status, or
                  (B) except in the case of the combat zone 
                designated for purposes of the Vietnam 
                conflict, the date which is 2 years after the 
                date designated under section 112 as the date 
                of termination of combatant activities in that 
                zone.
  (b) Definition of head of household.--
          (1) In general.--For purposes of this subtitle, an 
        individual shall be considered a head of a household 
        if, and only if, such individual is not married at the 
        close of his taxable year, is not a surviving spouse 
        (as defined in subsection (a)), and either--
                  (A) maintains as his home a household which 
                constitutes for more than one-half of such 
                taxable year the principal place of abode, as a 
                member of such household, of--
                          (i) a qualifying child of the 
                        individual (as defined in section 
                        152(c), determined without regard to 
                        section 152(e)), but not if such 
                        child--
                                  (I) is married at the close 
                                of the taxpayer's taxable year, 
                                and
                                  (II) is not a dependent of 
                                such individual by reason of 
                                section 152(b)(2) or 152(b)(3), 
                                or both, or
                          (ii) any other person who is a 
                        dependent of the taxpayer, if the 
                        taxpayer is entitled to a deduction for 
                        the taxable year for such person under 
                        section 151, or
                  (B) maintains a household which constitutes 
                for such taxable year the principal place of 
                abode of the father or mother of the taxpayer, 
                if the taxpayer is entitled to a deduction for 
                the taxable year for such father or mother 
                under section 151.
        For purposes of this paragraph, an individual shall be 
        considered as maintaining a household only if over half 
        of the cost of maintaining the household during the 
        taxable year is furnished by such individual.
          (2) Determination of status.--For purposes of this 
        subsection--
                  (A) an individual who is legally separated 
                from [his spouse] the individual's spouse under 
                a decree of divorce or of separate maintenance 
                shall not be considered as married;
                  (B) a taxpayer shall be considered as not 
                married at the close of [his taxable year] the 
                taxpayer's taxable year if at any time during 
                the taxable year [his spouse] the taxpayer's 
                spouse is a nonresident alien; and
                  (C) a taxpayer shall be considered as married 
                at the close of [his taxable year] the 
                taxpayer's taxable year if [his spouse] the 
                taxpayer's spouse (other than a spouse 
                described in subparagraph (B)) died during the 
                taxable year.
          (3) Limitations.--Notwithstanding paragraph (1), for 
        purposes of this subtitle a taxpayer shall not be 
        considered to be a head of a household--
                  (A) if at any time during the taxable year he 
                is a nonresident alien; or
                  (B) by reason of an individual who would not 
                be a dependent for the taxable year but for--
                          (i) subparagraph (H) of section 
                        152(d)(2), or
                          (ii) paragraph (3) of section 152(d).
  (c) Certain married individuals living apart.--For purposes 
of this part, an individual shall be treated as not married at 
the close of the taxable year if such individual is so treated 
under the provisions of section 7703(b).
  (d) Nonresident aliens.--In the case of a nonresident alien 
individual, the taxes imposed by sections 1 and 55 shall apply 
only as provided by section 871 or 877.
  (e) Cross reference.--For definition of taxable income, see 
section 63.

           *       *       *       *       *       *       *


PART IV--CREDITS AGAINST TAX

           *       *       *       *       *       *       *


Subpart A--NONREFUNDABLE PERSONAL CREDITS

           *       *       *       *       *       *       *


SEC. 21. EXPENSES FOR HOUSEHOLD AND DEPENDENT CARE SERVICES NECESSARY 
                    FOR GAINFUL EMPLOYMENT.

  (a) Allowance of credit.--
          (1) In general.--In the case of an individual for 
        which there are 1 or more qualifying individuals (as 
        defined in subsection (b)(1)) with respect to such 
        individual, there shall be allowed as a credit against 
        the tax imposed by this chapter for the taxable year an 
        amount equal to the applicable percentage of the 
        employment-related expenses (as defined in subsection 
        (b)(2)) paid by such individual during the taxable 
        year.
          (2) Applicable percentage defined.--For purposes of 
        paragraph (1), the term ``applicable percentage'' means 
        35 percent reduced (but not below 20 percent) by 1 
        percentage point for each $2,000 (or fraction thereof) 
        by which the taxpayer's adjusted gross income for the 
        taxable year exceeds $15,000.
  (b) Definitions of qualifying individual and employment-
related expenses.--For purposes of this section--
          (1) Qualifying individual.--The term ``qualifying 
        individual'' means--
                  (A) a dependent of the taxpayer (as defined 
                in section 152(a)(1)) who has not attained age 
                13,
                  (B) a dependent of the taxpayer (as defined 
                in section 152, determined without regard to 
                subsections (b)(1), (b)(2), and (d)(1)(B)) who 
                is physically or mentally incapable of caring 
                for himself or herself and who has the same 
                principal place of abode as the taxpayer for 
                more than one-half of such taxable year, or
                  (C) the spouse of the taxpayer, if the spouse 
                is physically or mentally incapable of caring 
                for himself or herself and who has the same 
                principal place of abode as the taxpayer for 
                more than one-half of such taxable year.
          (2) Employment-related expenses.--
                  (A) In general.--The term ``employment-
                related expenses'' means amounts paid for the 
                following expenses, but only if such expenses 
                are incurred to enable the taxpayer to be 
                gainfully employed for any period for which 
                there are 1 or more qualifying individuals with 
                respect to the taxpayer:
                          (i) expenses for household services, 
                        and
                          (ii) expenses for the care of a 
                        qualifying individual.
                Such term shall not include any amount paid for 
                services outside the taxpayer's household at a 
                camp where the qualifying individual stays 
                overnight.
                  (B) Exception.--Employment-related expenses 
                described in subparagraph (A) which are 
                incurred for services outside the taxpayer's 
                household shall be taken into account only if 
                incurred for the care of--
                          (i) a qualifying individual described 
                        in paragraph (1)(A), or
                          (ii) a qualifying individual (not 
                        described in paragraph (1)(A)) who 
                        regularly spends at least 8 hours each 
                        day in the taxpayer's household.
                  (C) Dependent care centers.--Employment-
                related expenses described in subparagraph (A) 
                which are incurred for services provided 
                outside the taxpayer's household by a dependent 
                care center (as defined in subparagraph (D)) 
                shall be taken into account only if--
                          (i) such center complies with all 
                        applicable laws and regulations of a 
                        State or unit of local government, and
                          (ii) the requirements of subparagraph 
                        (B) are met.
                  (D) Dependent care center defined.--For 
                purposes of this paragraph, the term 
                ``dependent care center'' means any facility 
                which--
                          (i) provides care for more than six 
                        individuals (other than individuals who 
                        reside at the facility), and
                          (ii) receives a fee, payment, or 
                        grant for providing services for any of 
                        the individuals (regardless of whether 
                        such facility is operated for profit).
  (c) Dollar limit on amount creditable.--The amount of the 
employment-related expenses incurred during any taxable year 
which may be taken into account under subsection (a) shall not 
exceed--
          (1) $3,000 if there is 1 qualifying individual with 
        respect to the taxpayer for such taxable year, or
          (2) $6,000 if there are 2 or more qualifying 
        individuals with respect to the taxpayer for such 
        taxable year.
The amount determined under paragraph (1) or (2) (whichever is 
applicable) shall be reduced by the aggregate amount excludable 
from gross income under section 129 for the taxable year.
  (d) Earned income limitation.--
          (1) In general.--Except as otherwise provided in this 
        subsection, the amount of the employment-related 
        expenses incurred during any taxable year which may be 
        taken into account under subsection (a) shall not 
        exceed--
                  (A) in the case of an individual who is not 
                married at the close of such year, such 
                individual's earned income for such year, or
                  (B) in the case of an individual who is 
                married at the close of such year, the lesser 
                of such individual's earned income or the 
                earned income of [his spouse] the individual's 
                spouse for such year.
          (2) Special rule for spouse who is a student or 
        incapable of caring for [himself] self.--In the case of 
        a spouse who is a student or a qualifying individual 
        described in subsection (b)(1)(C), for purposes of 
        paragraph (1), such spouse shall be deemed for each 
        month during which such spouse is a full-time student 
        at an educational institution, or is such a qualifying 
        individual, to be gainfully employed and to have earned 
        income of not less than--
                  (A) $250 if subsection (c)(1) applies for the 
                taxable year, or
                  (B) $500 if subsection (c)(2) applies for the 
                taxable year.
        In the case of [any husband and wife] any married 
        couple, this paragraph shall apply with respect to only 
        one spouse for any one month.
  (e) Special rules.--For purposes of this section--
          (1) Place of abode.--An individual shall not be 
        treated as having the same principal place of abode of 
        the taxpayer if at any time during the taxable year of 
        the taxpayer the relationship between the individual 
        and the taxpayer is in violation of local law.
          (2) Married couples must file joint return.--If the 
        taxpayer is married at the close of the taxable year, 
        the credit shall be allowed under subsection (a) only 
        if the taxpayer and [his spouse] the taxpayer's spouse 
        file a joint return for the taxable year.
          (3) Marital status.--An individual legally separated 
        from [his spouse] the individual's spouse under a 
        decree of divorce or of separate maintenance shall not 
        be considered as married.
          (4) Certain married individuals living apart.--If--
                  (A) an individual who is married and who 
                files a separate return--
                          (i) maintains as [his home] the 
                        individual's home a household which 
                        constitutes for more than one-half of 
                        the taxable year the principal place of 
                        abode of a qualifying individual, and
                          (ii) furnishes over half of the cost 
                        of maintaining such household during 
                        the taxable year, and
                  (B) during the last 6 months of such taxable 
                year such individual's spouse is not a member 
                of such household,
        such individual shall not be considered as married.
          (5) Special dependency test in case of divorced 
        parents, etc..--If--
                  (A) section 152(e) applies to any child with 
                respect to any calendar year, and
                  (B) such child is under the age of 13 or is 
                physically or mentally incapable of caring for 
                himself,
        in the case of any taxable year beginning in such 
        calendar year, such child shall be treated as a 
        qualifying individual described in subparagraph (A) or 
        (B) of subsection (b)(1) (whichever is appropriate) 
        with respect to the custodial parent (as defined in 
        section 152(e)(4)(A)), and shall not be treated as a 
        qualifying individual with respect to the noncustodial 
        parent.
          (6) Payments to related individuals.--No credit shall 
        be allowed under subsection (a) for any amount paid by 
        the taxpayer to an individual--
                  (A) with respect to whom, for the taxable 
                year, a deduction under section 151(c) 
                (relating to deduction for personal exemptions 
                for dependents) is allowable either to the 
                taxpayer or [his spouse] the taxpayer's spouse, 
                or
                  (B) who is a child of the taxpayer (within 
                the meaning of section 152(f)(1)) who has not 
                attained the age of 19 at the close of the 
                taxable year.
        For purposes of this paragraph, the term ``taxable 
        year'' means the taxable year of the taxpayer in which 
        the service is performed.
          (7) Student.--The term ``student'' means an 
        individual who during each of 5 calendar months during 
        the taxable year is a full-time student at an 
        educational organization.
          (8) Educational organization.--The term ``educational 
        organization'' means an educational organization 
        described in section 170(b)(1)(A)(ii).
          (9) Identifying information required with respect to 
        service provider.--No credit shall be allowed under 
        subsection (a) for any amount paid to any person 
        unless--
                  (A) the name, address, and taxpayer 
                identification number of such person are 
                included on the return claiming the credit, or
                  (B) if such person is an organization 
                described in section 501(c)(3) and exempt from 
                tax under section 501(a), the name and address 
                of such person are included on the return 
                claiming the credit.
        In the case of a failure to provide the information 
        required under the preceding sentence, the preceding 
        sentence shall not apply if it is shown that the 
        taxpayer exercised due diligence in attempting to 
        provide the information so required.
          (10) Identifying information required with respect to 
        qualifying individuals.--No credit shall be allowed 
        under this section with respect to any qualifying 
        individual unless the TIN of such individual is 
        included on the return claiming the credit.
  (f) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary to carry out the purposes of 
this section.

SEC. 22. CREDIT FOR THE ELDERLY AND THE PERMANENTLY AND TOTALLY 
                    DISABLED.

  (a) General rule.--In the case of a qualified individual, 
there shall be allowed as a credit against the tax imposed by 
this chapter for the taxable year an amount equal to 15 percent 
of such individual's section 22 amount for such taxable year.
  (b) Qualified individual.--For purposes of this section, the 
term ``qualified individual'' means any individual--
          (1) who has attained age 65 before the close of the 
        taxable year, or
          (2) who retired on disability before the close of the 
        taxable year and who, when he retired, was permanently 
        and totally disabled.
  (c) Section 22 amount.--For purposes of subsection (a)--
          (1) In general.--An individual's section 22 amount 
        for the taxable year shall be the applicable initial 
        amount determined under paragraph (2), reduced as 
        provided in paragraph (3) and in subsection (d).
          (2) Initial amount.--
                  (A) In general.--Except as provided in 
                subparagraph (B), the initial amount shall be--
                          (i) $5,000 in the case of a single 
                        individual, or a joint return where 
                        only one spouse is a qualified 
                        individual,
                          (ii) $7,500 in the case of a joint 
                        return where both spouses are qualified 
                        individuals, or
                          (iii) $3,750 in the case of a married 
                        individual filing a separate return.
                  (B) Limitation in case of individuals who 
                have not attained age 65.--
                          (i) In general.--In the case of a 
                        qualified individual who has not 
                        attained age 65 before the close of the 
                        taxable year, except as provided in 
                        clause (ii), the initial amount shall 
                        not exceed the disability income for 
                        the taxable year.
                          (ii) Special rules in case of joint 
                        return.--In the case of a joint return 
                        where both spouses are qualified 
                        individuals and at least one spouse has 
                        not attained age 65 before the close of 
                        the taxable year--
                                  (I) if both spouses have not 
                                attained age 65 before the 
                                close of the taxable year, the 
                                initial amount shall not exceed 
                                the sum of such spouses' 
                                disability income, or
                                  (II) if one spouse has 
                                attained age 65 before the 
                                close of the taxable year, the 
                                initial amount shall not exceed 
                                the sum of $5,000 plus the 
                                disability income for the 
                                taxable year of the spouse who 
                                has not attained age 65 before 
                                the close of the taxable year.
                          (iii) Disability income.--For 
                        purposes of this subparagraph, the term 
                        ``disability income'' means the 
                        aggregate amount includable in the 
                        gross income of the individual for the 
                        taxable year under section 72 or 105(a) 
                        to the extent such amount constitutes 
                        wages (or payments in lieu of wages) 
                        for the period during which the 
                        individual is absent from work on 
                        account of permanent and total 
                        disability.
          (3) Reduction.--
                  (A) In general.--The reduction under this 
                paragraph is an amount equal to the sum of the 
                amounts received by the individual (or, in the 
                case of a joint return, by either spouse) as a 
                pension or annuity or as a disability benefit--
                          (i) which is excluded from gross 
                        income and payable under--
                                  (I) title II of the Social 
                                Security Act,
                                  (II) the Railroad Retirement 
                                Act of 1974, or
                                  (III) a law administered by 
                                the Department of Veterans 
                                Affairs, or
                          (ii) which is excluded from gross 
                        income under any provision of law not 
                        contained in this title.
                No reduction shall be made under clause 
                (i)(III) for any amount described in section 
                104(a)(4).
                  (B) Treatment of certain workmen's 
                compensation benefits.--For purposes of 
                subparagraph (A), any amount treated as a 
                social security benefit under section 86(d)(3) 
                shall be treated as a disability benefit 
                received under title II of the Social Security 
                Act.
  (d) Adjusted gross income limitation.--If the adjusted gross 
income of the taxpayer exceeds--
          (1) $7,500 in the case of a single individual,
          (2) $10,000 in the case of a joint return, or
          (3) $5,000 in the case of a married individual filing 
        a separate return,
the section 22 amount shall be reduced by one-half of the 
excess of the adjusted gross income over $7,500, $10,000, or 
$5,000, as the case may be.
  (e) Definitions and special rules.--For purposes of this 
section--
          (1) Married couple must file joint return.--Except in 
        the case of a [husband and wife who live] married 
        couple who lives apart at all times during the taxable 
        year, if the taxpayer is married at the close of the 
        taxable year, the credit provided by this section shall 
        be allowed only if [the taxpayer and his spouse] the 
        taxpayer and the spouse of the taxpayer file a joint 
        return for the taxable year.
          (2) Marital status.--Marital status shall be 
        determined under section 7703.
          (3) Permanent and total disability defined.--An 
        individual is permanently and totally disabled if he is 
        unable to engage in any substantial gainful activity by 
        reason of any medically determinable physical or mental 
        impairment which can be expected to result in death or 
        which has lasted or can be expected to last for a 
        continuous period of not less than 12 months. An 
        individual shall not be considered to be permanently 
        and totally disabled unless he furnishes proof of the 
        existence thereof in such form and manner, and at such 
        times, as the Secretary may require.
  (f) Nonresident alien ineligible for credit.--No credit shall 
be allowed under this section to any nonresident alien.

           *       *       *       *       *       *       *


Subpart C--REFUNDABLE CREDITS

           *       *       *       *       *       *       *


SEC. 36. FIRST-TIME HOMEBUYER CREDIT.

  (a) Allowance of credit.--In the case of an individual who is 
a first-time homebuyer of a principal residence in the United 
States during a taxable year, there shall be allowed as a 
credit against the tax imposed by this subtitle for such 
taxable year an amount equal to 10 percent of the purchase 
price of the residence.
  (b) Limitations.--
          (1) Dollar limitation.--
                  (A) In general.--Except as otherwise provided 
                in this paragraph, the credit allowed under 
                subsection (a) shall not exceed $8,000.
                  (B) Married individuals filing separately.--
                In the case of a married individual filing a 
                separate return, subparagraph (A) shall be 
                applied by substituting ``$4,000'' for 
                ``$8,000''.
                  (C) Other individuals.--If two or more 
                individuals who are not married purchase a 
                principal residence, the amount of the credit 
                allowed under subsection (a) shall be allocated 
                among such individuals in such manner as the 
                Secretary may prescribe, except that the total 
                amount of the credits allowed to all such 
                individuals shall not exceed $8,000.
                  (D) Special rule for long-time residents of 
                same principal residence.--In the case of a 
                taxpayer to whom a credit under subsection (a) 
                is allowed by reason of subsection (c)(6), 
                subparagraphs (A), (B), and (C) shall be 
                applied by substituting ``$6,500'' for 
                ``$8,000'' and ``$3,250'' for ``$4,000''.
          (2) Limitation based on modified adjusted gross 
        income.--
                  (A) In general.--The amount allowable as a 
                credit under subsection (a) (determined without 
                regard to this paragraph) for the taxable year 
                shall be reduced (but not below zero) by the 
                amount which bears the same ratio to the amount 
                which is so allowable as--
                          (i) the excess (if any) of--
                                  (I) the taxpayer's modified 
                                adjusted gross income for such 
                                taxable year, over
                                  (II) $125,000 ($225,000 in 
                                the case of a joint return), 
                                bears to
                          (ii) $20,000.
                  (B) Modified adjusted gross income.--For 
                purposes of subparagraph (A), the term 
                ``modified adjusted gross income'' means the 
                adjusted gross income of the taxpayer for the 
                taxable year increased by any amount excluded 
                from gross income under section 911, 931, or 
                933.
          (3) Limitation based on purchase price.--No credit 
        shall be allowed under subsection (a) for the purchase 
        of any residence if the purchase price of such 
        residence exceeds $800,000.
          (4) Age limitation.--No credit shall be allowed under 
        subsection (a) with respect to the purchase of any 
        residence unless the taxpayer has attained age 18 as of 
        the date of such purchase. In the case of any taxpayer 
        who is married (within the meaning of section 7703), 
        the taxpayer shall be treated as meeting the age 
        requirement of the preceding sentence if the taxpayer 
        or the taxpayer's spouse meets such age requirement.
  (c) Definitions.--For purposes of this section--
          (1) First-time homebuyer.--The term ``first-time 
        homebuyer'' means any individual if such individual 
        (and if married, such individual's spouse) had no 
        present ownership interest in a principal residence 
        during the 3-year period ending on the date of the 
        purchase of the principal residence to which this 
        section applies.
          (2) Principal residence.--The term ``principal 
        residence'' has the same meaning as when used in 
        section 121.
          (3) Purchase.--
                  (A) In general.--The term ``purchase'' means 
                any acquisition, but only if--
                          (i) the property is not acquired from 
                        a person related to the person 
                        acquiring such property (or, if 
                        married, such individual's spouse), and
                          (ii) the basis of the property in the 
                        hands of the person acquiring such 
                        property is not determined--
                                  (I) in whole or in part by 
                                reference to the adjusted basis 
                                of such property in the hands 
                                of the person from whom 
                                acquired, or
                                  (II) under section 1014(a) 
                                (relating to property acquired 
                                from a decedent).
                  (B) Construction.--A residence which is 
                constructed by the taxpayer shall be treated as 
                purchased by the taxpayer on the date the 
                taxpayer first occupies such residence.
          (4) Purchase price.--The term ``purchase price'' 
        means the adjusted basis of the principal residence on 
        the date such residence is purchased.
          (5) Related persons.--A person shall be treated as 
        related to another person if the relationship between 
        such persons would result in the disallowance of losses 
        under section 267 or 707(b) (but, in applying section 
        267(b) and (c) for purposes of this section, paragraph 
        (4) of section 267(c) shall be treated as providing 
        that the family of an individual shall include only 
        [his spouse] the individual's spouse , ancestors, and 
        lineal descendants).
          (6) Exception for long-time residents of same 
        principal residence.--In the case of an individual 
        (and, if married, such individual's spouse) who has 
        owned and used the same residence as such individual's 
        principal residence for any 5-consecutive-year period 
        during the 8-year period ending on the date of the 
        purchase of a subsequent principal residence, such 
        individual shall be treated as a first-time homebuyer 
        for purposes of this section with respect to the 
        purchase of such subsequent residence.
  (d) Exceptions.--No credit under subsection (a) shall be 
allowed to any taxpayer for any taxable year with respect to 
the purchase of a residence if--
          (1) the taxpayer is a nonresident alien,
          (2) the taxpayer disposes of such residence (or such 
        residence ceases to be the principal residence of the 
        taxpayer (and, if married, the taxpayer's spouse)) 
        before the close of such taxable year,
          (3) a deduction under section 151 with respect to 
        such taxpayer is allowable to another taxpayer for such 
        taxable year, or
          (4) the taxpayer fails to attach to the return of tax 
        for such taxable year a properly executed copy of the 
        settlement statement used to complete such purchase.
  (e) Reporting.--If the Secretary requires information 
reporting under section 6045 by a person described in 
subsection (e)(2) thereof to verify the eligibility of 
taxpayers for the credit allowable by this section, the 
exception provided by section 6045(e) shall not apply.
  (f) Recapture of credit.--
          (1) In general.--Except as otherwise provided in this 
        subsection, if a credit under subsection (a) is allowed 
        to a taxpayer, the tax imposed by this chapter shall be 
        increased by 62/3 percent of the amount of such credit 
        for each taxable year in the recapture period.
          (2) Acceleration of recapture.--If a taxpayer 
        disposes of the principal residence with respect to 
        which a credit was allowed under subsection (a) (or 
        such residence ceases to be the principal residence of 
        the taxpayer (and, if married, the taxpayer's spouse)) 
        before the end of the recapture period--
                  (A) the tax imposed by this chapter for the 
                taxable year of such disposition or cessation 
                shall be increased by the excess of the amount 
                of the credit allowed over the amounts of tax 
                imposed by paragraph (1) for preceding taxable 
                years, and
                  (B) paragraph (1) shall not apply with 
                respect to such credit for such taxable year or 
                any subsequent taxable year.
          (3) Limitation based on gain.--In the case of the 
        sale of the principal residence to a person who is not 
        related to the taxpayer, the increase in tax determined 
        under paragraph (2) shall not exceed the amount of gain 
        (if any) on such sale. Solely for purposes of the 
        preceding sentence, the adjusted basis of such 
        residence shall be reduced by the amount of the credit 
        allowed under subsection (a) to the extent not 
        previously recaptured under paragraph (1).
          (4) Exceptions.--
                  (A) Death of taxpayer.--Paragraphs (1) and 
                (2) shall not apply to any taxable year ending 
                after the date of the taxpayer's death.
                  (B) Involuntary conversion.--Paragraph (2) 
                shall not apply in the case of a residence 
                which is compulsorily or involuntarily 
                converted (within the meaning of section 
                1033(a)) if the taxpayer acquires a new 
                principal residence during the 2-year period 
                beginning on the date of the disposition or 
                cessation referred to in paragraph (2). 
                Paragraph (2) shall apply to such new principal 
                residence during the recapture period in the 
                same manner as if such new principal residence 
                were the converted residence.
                  (C) Transfers between spouses or incident to 
                divorce.--In the case of a transfer of a 
                residence to which section 1041(a) applies--
                          (i) paragraph (2) shall not apply to 
                        such transfer, and
                          (ii) in the case of taxable years 
                        ending after such transfer, paragraphs 
                        (1) and (2) shall apply to the 
                        transferee in the same manner as if 
                        such transferee were the transferor 
                        (and shall not apply to the 
                        transferor).
                  (D) Waiver of recapture for purchases in 2009 
                and 2010.--In the case of any credit allowed 
                with respect to the purchase of a principal 
                residence after December 31, 2008--
                          (i) paragraph (1) shall not apply, 
                        and
                          (ii) paragraph (2) shall apply only 
                        if the disposition or cessation 
                        described in paragraph (2) with respect 
                        to such residence occurs during the 36-
                        month period beginning on the date of 
                        the purchase of such residence by the 
                        taxpayer.
                  (E) Special rule for members of the armed 
                forces, etc..--
                          (i) In general.--In the case of the 
                        disposition of a principal residence by 
                        an individual (or a cessation referred 
                        to in paragraph (2)) after December 31, 
                        2008, in connection with Government 
                        orders received by such individual, or 
                        such individual's spouse, for qualified 
                        official extended duty service--
                                  (I) paragraph (2) and 
                                subsection (d)(2) shall not 
                                apply to such disposition (or 
                                cessation), and
                                  (II) if such residence was 
                                acquired before January 1, 
                                2009, paragraph (1) shall not 
                                apply to the taxable year in 
                                which such disposition (or 
                                cessation) occurs or any 
                                subsequent taxable year.
                          (ii) Qualified official extended duty 
                        service.--For purposes of this section, 
                        the term ``qualified official extended 
                        duty service'' means service on 
                        qualified official extended duty as--
                                  (I) a member of the uniformed 
                                services,
                                  (II) a member of the Foreign 
                                Service of the United States, 
                                or
                                  (III) an employee of the 
                                intelligence community.
                          (iii) Definitions.--Any term used in 
                        this subparagraph which is also used in 
                        paragraph (9) of section 121(d) shall 
                        have the same meaning as when used in 
                        such paragraph.
          (5) Joint returns.--In the case of a credit allowed 
        under subsection (a) with respect to a joint return, 
        half of such credit shall be treated as having been 
        allowed to each individual filing such return for 
        purposes of this subsection.
          (6) Return requirement.--If the tax imposed by this 
        chapter for the taxable year is increased under this 
        subsection, the taxpayer shall, notwithstanding section 
        6012, be required to file a return with respect to the 
        taxes imposed under this subtitle.
          (7) Recapture period.--For purposes of this 
        subsection, the term ``recapture period'' means the 15 
        taxable years beginning with the second taxable year 
        following the taxable year in which the purchase of the 
        principal residence for which a credit is allowed under 
        subsection (a) was made.
  (g) Election to treat purchase in prior year.--In the case of 
a purchase of a principal residence after December 31, 2008, a 
taxpayer may elect to treat such purchase as made on December 
31 of the calendar year preceding such purchase for purposes of 
this section (other than subsections (b)(4), (c), (f)(4)(D), 
and (h)).
  (h) Application of section.--
          (1) In general.--This section shall only apply to a 
        principal residence purchased by the taxpayer on or 
        after April 9, 2008, and before May 1, 2010.
          (2) Exception in case of binding contract.--In the 
        case of any taxpayer who enters into a written binding 
        contract before May 1, 2010, to close on the purchase 
        of a principal residence before July 1, 2010, and who 
        purchases such residence before October 1, 2010, 
        paragraph (1) shall be applied by substituting 
        ``October 1, 2010'' for ``May 1, 2010''.
          (3) Special rule for individuals on qualified 
        official extended duty outside the United States.--In 
        the case of any individual who serves on qualified 
        official extended duty service (as defined in section 
        121(d)(9)(C)(i)) outside the United States for at least 
        90 days during the period beginning after December 31, 
        2008, and ending before May 1, 2010, and, if married, 
        such individual's spouse--
                  (A) paragraphs (1) and (2) shall each be 
                applied by substituting ``May 1, 2011'' for 
                ``May 1, 2010'', and
                  (B) paragraph (2) shall be applied by 
                substituting ``July 1, 2011'' for ``July 1, 
                2010'', and for ``October 1, 2010''.

           *       *       *       *       *       *       *


SEC. 36B. REFUNDABLE CREDIT FOR COVERAGE UNDER A QUALIFIED HEALTH PLAN.

  (a) In general.--In the case of an applicable taxpayer, there 
shall be allowed as a credit against the tax imposed by this 
subtitle for any taxable year an amount equal to the premium 
assistance credit amount of the taxpayer for the taxable year.
  (b) Premium assistance credit amount.--For purposes of this 
section--
          (1) In general.--The term ``premium assistance credit 
        amount'' means, with respect to any taxable year, the 
        sum of the premium assistance amounts determined under 
        paragraph (2) with respect to all coverage months of 
        the taxpayer occurring during the taxable year.
          (2) Premium assistance amount.--The premium 
        assistance amount determined under this subsection with 
        respect to any coverage month is the amount equal to 
        the lesser of--
                  (A) the monthly premiums for such month for 1 
                or more qualified health plans offered in the 
                individual market within a State which cover 
                the taxpayer, the taxpayer's spouse, or any 
                dependent (as defined in section 152) of the 
                taxpayer and which were enrolled in through an 
                Exchange established by the State under 1311 of 
                the Patient Protection and Affordable Care Act, 
                or
                  (B) the excess (if any) of--
                          (i) the adjusted monthly premium for 
                        such month for the applicable second 
                        lowest cost silver plan with respect to 
                        the taxpayer, over
                          (ii) an amount equal to 1/12 of the 
                        product of the applicable percentage 
                        and the taxpayer's household income for 
                        the taxable year.
          (3) Other terms and rules relating to premium 
        assistance amounts.--For purposes of paragraph (2)--
                  (A) Applicable percentage.--
                          (i) In general.--Except as provided 
                        in clause (ii), the applicable 
                        percentage for any taxable year shall 
                        be the percentage such that the 
                        applicable percentage for any taxpayer 
                        whose household income is within an 
                        income tier specified in the following 
                        table shall increase, on a sliding 
                        scale in a linear manner, from the 
                        initial premium percentage to the final 
                        premium percentage specified in such 
                        table for such income tier:
                          (ii) Indexing.--
                                  (I) In general.--Subject to 
                                subclause (II), in the case of 
                                taxable years beginning in any 
                                calendar year after 2014, the 
                                initial and final applicable 
                                percentages under clause (i) 
                                (as in effect for the preceding 
                                calendar year after application 
                                of this clause) shall be 
                                adjusted to reflect the excess 
                                of the rate of premium growth 
                                for the preceding calendar year 
                                over the rate of income growth 
                                for the preceding calendar 
                                year.
                                  (II) Additional adjustment.--
                                Except as provided in subclause 
                                (III), in the case of any 
                                calendar year after 2018, the 
                                percentages described in 
                                subclause (I) shall, in 
                                addition to the adjustment 
                                under subclause (I), be 
                                adjusted to reflect the excess 
                                (if any) of the rate of premium 
                                growth estimated under 
                                subclause (I) for the preceding 
                                calendar year over the rate of 
                                growth in the consumer price 
                                index for the preceding 
                                calendar year.
                                  (III) Failsafe.--Subclause 
                                (II) shall apply for any 
                                calendar year only if the 
                                aggregate amount of premium tax 
                                credits under this section and 
                                cost-sharing reductions under 
                                section 1402 of the Patient 
                                Protection and Affordable Care 
                                Act for the preceding calendar 
                                year exceeds an amount equal to 
                                0.504 percent of the gross 
                                domestic product for the 
                                preceding calendar year.
                  (B) Applicable second lowest cost silver 
                plan.--The applicable second lowest cost silver 
                plan with respect to any applicable taxpayer is 
                the second lowest cost silver plan of the 
                individual market in the rating area in which 
                the taxpayer resides which--
                          (i) is offered through the same 
                        Exchange through which the qualified 
                        health plans taken into account under 
                        paragraph (2)(A) were offered, and
                          (ii) provides--
                                  (I) self-only coverage in the 
                                case of an applicable 
                                taxpayer--
                                          (aa) whose tax for 
                                        the taxable year is 
                                        determined under 
                                        section 1(c) (relating 
                                        to unmarried 
                                        individuals other than 
                                        surviving spouses and 
                                        heads of households) 
                                        and who is not allowed 
                                        a deduction under 
                                        section 151 for the 
                                        taxable year with 
                                        respect to a dependent, 
                                        or
                                          (bb) who is not 
                                        described in item (aa) 
                                        but who purchases only 
                                        self-only coverage, and
                                  (II) family coverage in the 
                                case of any other applicable 
                                taxpayer.
                If a taxpayer files a joint return and no 
                credit is allowed under this section with 
                respect to 1 of the spouses by reason of 
                subsection (e), the taxpayer shall be treated 
                as described in clause (ii)(I) unless a 
                deduction is allowed under section 151 for the 
                taxable year with respect to a dependent other 
                than either spouse and subsection (e) does not 
                apply to the dependent.
                  (C) Adjusted monthly premium.--The adjusted 
                monthly premium for an applicable second lowest 
                cost silver plan is the monthly premium which 
                would have been charged (for the rating area 
                with respect to which the premiums under 
                paragraph (2)(A) were determined) for the plan 
                if each individual covered under a qualified 
                health plan taken into account under paragraph 
                (2)(A) were covered by such silver plan and the 
                premium was adjusted only for the age of each 
                such individual in the manner allowed under 
                section 2701 of the Public Health Service Act. 
                In the case of a State participating in the 
                wellness discount demonstration project under 
                section 2705(d) of the Public Health Service 
                Act, the adjusted monthly premium shall be 
                determined without regard to any premium 
                discount or rebate under such project.
                  (D) Additional benefits.--If--
                          (i) a qualified health plan under 
                        section 1302(b)(5) of the Patient 
                        Protection and Affordable Care Act 
                        offers benefits in addition to the 
                        essential health benefits required to 
                        be provided by the plan, or
                          (ii) a State requires a qualified 
                        health plan under section 1311(d)(3)(B) 
                        of such Act to cover benefits in 
                        addition to the essential health 
                        benefits required to be provided by the 
                        plan,
                the portion of the premium for the plan 
                properly allocable (under rules prescribed by 
                the Secretary of Health and Human Services) to 
                such additional benefits shall not be taken 
                into account in determining either the monthly 
                premium or the adjusted monthly premium under 
                paragraph (2).
                  (E) Special rule for pediatric dental 
                coverage.--For purposes of determining the 
                amount of any monthly premium, if an individual 
                enrolls in both a qualified health plan and a 
                plan described in section 1311(d)(2)(B)(ii)(I) 
                of the Patient Protection and Affordable Care 
                Act for any plan year, the portion of the 
                premium for the plan described in such section 
                that (under regulations prescribed by the 
                Secretary) is properly allocable to pediatric 
                dental benefits which are included in the 
                essential health benefits required to be 
                provided by a qualified health plan under 
                section 1302(b)(1)(J) of such Act shall be 
                treated as a premium payable for a qualified 
                health plan.
  (c) Definition and rules relating to applicable taxpayers, 
coverage months, and qualified health plan.--For purposes of 
this section--
          (1) Applicable taxpayer.--
                  (A) In general.--The term ``applicable 
                taxpayer'' means, with respect to any taxable 
                year, a taxpayer whose household income for the 
                taxable year equals or exceeds 100 percent but 
                does not exceed 400 percent of an amount equal 
                to the poverty line for a family of the size 
                involved.
                  (B) Special rule for certain individuals 
                lawfully present in the United States.--If--
                          (i) a taxpayer has a household income 
                        which is not greater than 100 percent 
                        of an amount equal to the poverty line 
                        for a family of the size involved, and
                          (ii) the taxpayer is an alien 
                        lawfully present in the United States, 
                        but is not eligible for the medicaid 
                        program under title XIX of the Social 
                        Security Act by reason of such alien 
                        status,
                the taxpayer shall, for purposes of the credit 
                under this section, be treated as an applicable 
                taxpayer with a household income which is equal 
                to 100 percent of the poverty line for a family 
                of the size involved.
                  (C) Married couples must file joint return.--
                If the taxpayer is married (within the meaning 
                of section 7703) at the close of the taxable 
                year, the taxpayer shall be treated as an 
                applicable taxpayer only if the taxpayer and 
                the taxpayer's spouse file a joint return for 
                the taxable year.
                  (D) Denial of credit to dependents.--No 
                credit shall be allowed under this section to 
                any individual with respect to whom a deduction 
                under section 151 is allowable to another 
                taxpayer for a taxable year beginning in the 
                calendar year in which such individual's 
                taxable year begins.
          (2) Coverage month.--For purposes of this 
        subsection--
                  (A) In general.--The term ``coverage month'' 
                means, with respect to an applicable taxpayer, 
                any month if--
                          (i) as of the first day of such month 
                        the taxpayer, the taxpayer's spouse, or 
                        any dependent of the taxpayer is 
                        covered by a qualified health plan 
                        described in subsection (b)(2)(A) that 
                        was enrolled in through an Exchange 
                        established by the State under section 
                        1311 of the Patient Protection and 
                        Affordable Care Act, and
                          (ii) the premium for coverage under 
                        such plan for such month is paid by the 
                        taxpayer (or through advance payment of 
                        the credit under subsection (a) under 
                        section 1412 of the Patient Protection 
                        and Affordable Care Act).
                  (B) Exception for minimum essential 
                coverage.--
                          (i) In general.--The term ``coverage 
                        month'' shall not include any month 
                        with respect to an individual if for 
                        such month the individual is eligible 
                        for minimum essential coverage other 
                        than eligibility for coverage described 
                        in section 5000A(f)(1)(C) (relating to 
                        coverage in the individual market).
                          (ii) Minimum essential coverage.--The 
                        term ``minimum essential coverage'' has 
                        the meaning given such term by section 
                        5000A(f).
                  (C) Special rule for employer-sponsored 
                minimum essential coverage.--For purposes of 
                subparagraph (B)--
                          (i) Coverage must be affordable.--
                        Except as provided in clause (iii), an 
                        employee shall not be treated as 
                        eligible for minimum essential coverage 
                        if such coverage--
                                  (I) consists of an eligible 
                                employer-sponsored plan (as 
                                defined in section 
                                5000A(f)(2)), and
                                  (II) the employee's required 
                                contribution (within the 
                                meaning of section 
                                5000A(e)(1)(B)) with respect to 
                                the plan exceeds 9.5 percent of 
                                the applicable taxpayer's 
                                household income.
                 This clause shall also apply to an individual 
                who is eligible to enroll in the plan by reason 
                of a relationship the individual bears to the 
                employee.
                          (ii) Coverage must provide minimum 
                        value.--Except as provided in clause 
                        (iii), an employee shall not be treated 
                        as eligible for minimum essential 
                        coverage if such coverage consists of 
                        an eligible employer-sponsored plan (as 
                        defined in section 5000A(f)(2)) and the 
                        plan's share of the total allowed costs 
                        of benefits provided under the plan is 
                        less than 60 percent of such costs.
                          (iii) Employee or family must not be 
                        covered under employer plan.--Clauses 
                        (i) and (ii) shall not apply if the 
                        employee (or any individual described 
                        in the last sentence of clause (i)) is 
                        covered under the eligible employer-
                        sponsored plan or the grandfathered 
                        health plan.
                          (iv) Indexing.--In the case of plan 
                        years beginning in any calendar year 
                        after 2014, the Secretary shall adjust 
                        the 9.5 percent under clause (i)(II) in 
                        the same manner as the percentages are 
                        adjusted under subsection 
                        (b)(3)(A)(ii).
          (3) Definitions and other rules.--
                  (A) Qualified health plan.--The term 
                ``qualified health plan'' has the meaning given 
                such term by section 1301(a) of the Patient 
                Protection and Affordable Care Act, except that 
                such term shall not include a qualified health 
                plan which is a catastrophic plan described in 
                section 1302(e) of such Act.
                  (B) Grandfathered health plan.--The term 
                ``grandfathered health plan'' has the meaning 
                given such term by section 1251 of the Patient 
                Protection and Affordable Care Act.
          (4) Special rules for qualified small employer health 
        reimbursement arrangements.--
                  (A) In general.--The term ``coverage month'' 
                shall not include any month with respect to an 
                employee (or any spouse or dependent of such 
                employee) if for such month the employee is 
                provided a qualified small employer health 
                reimbursement arrangement which constitutes 
                affordable coverage.
                  (B) Denial of double benefit.--In the case of 
                any employee who is provided a qualified small 
                employer health reimbursement arrangement for 
                any coverage month (determined without regard 
                to subparagraph (A)), the credit otherwise 
                allowable under subsection (a) to the taxpayer 
                for such month shall be reduced (but not below 
                zero) by the amount described in subparagraph 
                (C)(i)(II) for such month.
                  (C) Affordable coverage.--For purposes of 
                subparagraph (A), a qualified small employer 
                health reimbursement arrangement shall be 
                treated as constituting affordable coverage for 
                a month if--
                          (i) the excess of--
                                  (I) the amount that would be 
                                paid by the employee as the 
                                premium for such month for 
                                self-only coverage under the 
                                second lowest cost silver plan 
                                offered in the relevant 
                                individual health insurance 
                                market, over
                                  (II) 1/
                                12 of the employee's 
                                permitted benefit (as defined 
                                in section 9831(d)(3)(C)) under 
                                such arrangement, does not 
                                exceed--
                          (ii) 1/12 of 
                        9.5 percent of the employee's household 
                        income.
                  (D) Qualified small employer health 
                reimbursement arrangement.--For purposes of 
                this paragraph, the term ``qualified small 
                employer health reimbursement arrangement'' has 
                the meaning given such term by section 
                9831(d)(2).
                  (E) Coverage for less than entire year.--In 
                the case of an employee who is provided a 
                qualified small employer health reimbursement 
                arrangement for less than an entire year, 
                subparagraph (C)(i)(II) shall be applied by 
                substituting ``the number of months during the 
                year for which such arrangement was provided'' 
                for ``12''.
                  (F) Indexing.--In the case of plan years 
                beginning in any calendar year after 2014, the 
                Secretary shall adjust the 9.5 percent amount 
                under subparagraph (C)(ii) in the same manner 
                as the percentages are adjusted under 
                subsection (b)(3)(A)(ii).
  (d) Terms relating to income and families.--For purposes of 
this section--
          (1) Family size.--The family size involved with 
        respect to any taxpayer shall be equal to the number of 
        individuals for whom the taxpayer is allowed a 
        deduction under section 151 (relating to allowance of 
        deduction for personal exemptions) for the taxable 
        year.
          (2) Household income.--
                  (A) Household income.--The term ``household 
                income'' means, with respect to any taxpayer, 
                an amount equal to the sum of--
                          (i) the modified adjusted gross 
                        income of the taxpayer, plus
                          (ii) the aggregate modified adjusted 
                        gross incomes of all other individuals 
                        who--
                                  (I) were taken into account 
                                in determining the taxpayer's 
                                family size under paragraph 
                                (1), and
                                  (II) were required to file a 
                                return of tax imposed by 
                                section 1 for the taxable year.
                  (B) Modified adjusted gross income.--The term 
                ``modified adjusted gross income'' means 
                adjusted gross income increased by--
                          (i) any amount excluded from gross 
                        income under section 911,
                          (ii) any amount of interest received 
                        or accrued by the taxpayer during the 
                        taxable year which is exempt from tax, 
                        and
                          (iii) an amount equal to the portion 
                        of the taxpayer's social security 
                        benefits (as defined in section 86(d)) 
                        which is not included in gross income 
                        under section 86 for the taxable year.
          (3) Poverty line.--
                  (A) In general.--The term ``poverty line'' 
                has the meaning given that term in section 
                2110(c)(5) of the Social Security Act (42 
                U.S.C. 1397jj(c)(5)).
                  (B) Poverty line used.--In the case of any 
                qualified health plan offered through an 
                Exchange for coverage during a taxable year 
                beginning in a calendar year, the poverty line 
                used shall be the most recently published 
                poverty line as of the 1st day of the regular 
                enrollment period for coverage during such 
                calendar year.
  (e) Rules for individuals not lawfully present.--
          (1) In general.--If 1 or more individuals for whom a 
        taxpayer is allowed a deduction under section 151 
        (relating to allowance of deduction for personal 
        exemptions) for the taxable year (including the 
        taxpayer or [his spouse] the taxpayer's spouse ) are 
        individuals who are not lawfully present--
                  (A) the aggregate amount of premiums 
                otherwise taken into account under clauses (i) 
                and (ii) of subsection (b)(2)(A) shall be 
                reduced by the portion (if any) of such 
                premiums which is attributable to such 
                individuals, and
                  (B) for purposes of applying this section, 
                the determination as to what percentage a 
                taxpayer's household income bears to the 
                poverty level for a family of the size involved 
                shall be made under one of the following 
                methods:
                          (i) A method under which--
                                  (I) the taxpayer's family 
                                size is determined by not 
                                taking such individuals into 
                                account, and
                                  (II) the taxpayer's household 
                                income is equal to the product 
                                of the taxpayer's household 
                                income (determined without 
                                regard to this subsection) and 
                                a fraction--
                                          (aa) the numerator of 
                                        which is the poverty 
                                        line for the taxpayer's 
                                        family size determined 
                                        after application of 
                                        subclause (I), and
                                          (bb) the denominator 
                                        of which is the poverty 
                                        line for the taxpayer's 
                                        family size determined 
                                        without regard to 
                                        subclause (I).
                          (ii) A comparable method reaching the 
                        same result as the method under clause 
                        (i).
          (2) Lawfully present.--For purposes of this section, 
        an individual shall be treated as lawfully present only 
        if the individual is, and is reasonably expected to be 
        for the entire period of enrollment for which the 
        credit under this section is being claimed, a citizen 
        or national of the United States or an alien lawfully 
        present in the United States.
          (3) Secretarial authority.--The Secretary of Health 
        and Human Services, in consultation with the Secretary, 
        shall prescribe rules setting forth the methods by 
        which calculations of family size and household income 
        are made for purposes of this subsection. Such rules 
        shall be designed to ensure that the least burden is 
        placed on individuals enrolling in qualified health 
        plans through an Exchange and taxpayers eligible for 
        the credit allowable under this section.
  (f) Reconciliation of credit and advance credit.--
          (1) In general.--The amount of the credit allowed 
        under this section for any taxable year shall be 
        reduced (but not below zero) by the amount of any 
        advance payment of such credit under section 1412 of 
        the Patient Protection and Affordable Care Act.
          (2) Excess advance payments.--
                  (A) In general.--If the advance payments to a 
                taxpayer under section 1412 of the Patient 
                Protection and Affordable Care Act for a 
                taxable year exceed the credit allowed by this 
                section (determined without regard to paragraph 
                (1)), the tax imposed by this chapter for the 
                taxable year shall be increased by the amount 
                of such excess.
                  (B) Limitation on increase.--
                          (i) In general.--In the case of a 
                        taxpayer whose household income is less 
                        than 400 percent of the poverty line 
                        for the size of the family involved for 
                        the taxable year, the amount of the 
                        increase under subparagraph (A) shall 
                        in no event exceed the applicable 
                        dollar amount determined in accordance 
                        with the following table (one-half of 
                        such amount in the case of a taxpayer 
                        whose tax is determined under section 
                        1(c) for the taxable year):
                          (ii) Indexing of amount.--In the case 
                        of any calendar year beginning after 
                        2014, each of the dollar amounts in the 
                        table contained under clause (i) shall 
                        be increased by an amount equal to--
                                  (I) such dollar amount, 
                                multiplied by
                                  (II) the cost-of-living 
                                adjustment determined under 
                                section 1(f)(3) for the 
                                calendar year, determined by 
                                substituting ``calendar year 
                                2013'' for ``calendar year 
                                2016'' in subparagraph (A)(ii) 
                                thereof.
                 If the amount of any increase under clause (i) 
                is not a multiple of $50, such increase shall 
                be rounded to the next lowest multiple of $50.
          (3) Information requirement.--Each Exchange (or any 
        person carrying out 1 or more responsibilities of an 
        Exchange under section 1311(f)(3) or 1321(c) of the 
        Patient Protection and Affordable Care Act) shall 
        provide the following information to the Secretary and 
        to the taxpayer with respect to any health plan 
        provided through the Exchange:
                  (A) The level of coverage described in 
                section 1302(d) of the Patient Protection and 
                Affordable Care Act and the period such 
                coverage was in effect.
                  (B) The total premium for the coverage 
                without regard to the credit under this section 
                or cost-sharing reductions under section 1402 
                of such Act.
                  (C) The aggregate amount of any advance 
                payment of such credit or reductions under 
                section 1412 of such Act.
                  (D) The name, address, and TIN of the primary 
                insured and the name and TIN of each other 
                individual obtaining coverage under the policy.
                  (E) Any information provided to the Exchange, 
                including any change of circumstances, 
                necessary to determine eligibility for, and the 
                amount of, such credit.
                  (F) Information necessary to determine 
                whether a taxpayer has received excess advance 
                payments.
  (g) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary to carry out the provisions of 
this section, including regulations which provide for--
          (1) the coordination of the credit allowed under this 
        section with the program for advance payment of the 
        credit under section 1412 of the Patient Protection and 
        Affordable Care Act, and
          (2) the application of subsection (f) where the 
        filing status of the taxpayer for a taxable year is 
        different from such status used for determining the 
        advance payment of the credit.

           *       *       *       *       *       *       *


Subpart D--BUSINESS RELATED CREDITS

           *       *       *       *       *       *       *


SEC. 38. GENERAL BUSINESS CREDIT.

  (a) Allowance of credit.--There shall be allowed as a credit 
against the tax imposed by this chapter for the taxable year an 
amount equal to the sum of--
          (1) the business credit carryforwards carried to such 
        taxable year,
          (2) the amount of the current year business credit, 
        plus
          (3) the business credit carrybacks carried to such 
        taxable year.
  (b) Current year business credit.--For purposes of this 
subpart, the amount of the current year business credit is the 
sum of the following credits determined for the taxable year:
          (1) the investment credit determined under section 
        46,
          (2) the work opportunity credit determined under 
        section 51(a),
          (3) the alcohol fuels credit determined under section 
        40(a),
          (4) the research credit determined under section 
        41(a),
          (5) the low-income housing credit determined under 
        section 42(a),
          (6) the enhanced oil recovery credit under section 
        43(a),
          (7) in the case of an eligible small business (as 
        defined in section 44(b)), the disabled access credit 
        determined under section 44(a),
          (8) the renewable electricity production credit under 
        section 45(a),
          (9) the empowerment zone employment credit determined 
        under section 1396(a),
          (10) the Indian employment credit as determined under 
        section 45A(a),
          (11) the employer social security credit determined 
        under section 45B(a),
          (12) the orphan drug credit determined under section 
        45C(a),
          (13) the new markets tax credit determined under 
        section 45D(a),
          (14) in the case of an eligible employer (as defined 
        in section 45E(c)), the small employer pension plan 
        startup cost credit determined under section 45E(a),
          (15) the employer-provided child care credit 
        determined under section 45F(a),
          (16) the railroad track maintenance credit determined 
        under section 45G(a),
          (17) the biodiesel fuels credit determined under 
        section 40A(a),
          (18) the low sulfur diesel fuel production credit 
        determined under section 45H(a),
          (19) the marginal oil and gas well production credit 
        determined under section 45I(a),
          (20) the distilled spirits credit determined under 
        section 5011(a),
          (21) the advanced nuclear power facility production 
        credit determined under section 45J(a),
          (22) the nonconventional source production credit 
        determined under section 45K(a),
          (23) the new energy efficient home credit determined 
        under section 45L(a),
          (24) the portion of the alternative motor vehicle 
        credit to which section 30B(g)(1) applies,
          (25) the portion of the alternative fuel vehicle 
        refueling property credit to which section 30C(d)(1) 
        applies,
          (26) the mine rescue team training credit determined 
        under section 45N(a),
          (27) in the case of an eligible agricultural business 
        (as defined in section 45O(e)), the agricultural 
        chemicals security credit determined under section 
        45O(a),
          (28) the differential wage payment credit determined 
        under section 45P(a),
          (29) the carbon dioxide sequestration credit 
        determined under section 45Q(a),
          (30) the portion of the new qualified plug-in 
        electric drive motor vehicle credit to which section 
        30D(c)(1) applies,
          (31) the small employer health insurance credit 
        determined under section 45R, plus
          (32) in the case of an eligible employer (as defined 
        in section 45S(c)), the paid family and medical leave 
        credit determined under section 45S(a).
  (c) Limitation based on amount of tax.--
          (1) In general.--The credit allowed under subsection 
        (a) for any taxable year shall not exceed the excess 
        (if any) of the taxpayer's net income tax over the 
        greater of--
                  (A) the tentative minimum tax for the taxable 
                year, or
                  (B) 25 percent of so much of the taxpayer's 
                net regular tax liability as exceeds $25,000.
        For purposes of the preceding sentence, the term ``net 
        income tax'' means the sum of the regular tax liability 
        and the tax imposed by section 55, reduced by the 
        credits allowable under subparts A and B of this part, 
        and the term ``net regular tax liability'' means the 
        regular tax liability reduced by the sum of the credits 
        allowable under subparts A and B of this part.
          (2) Empowerment zone employment credit may offset 25 
        percent of minimum tax.--
                  (A) In general.--In the case of the 
                empowerment zone employment credit--
                          (i) this section and section 39 shall 
                        be applied separately with respect to 
                        such credit, and
                          (ii) for purposes of applying 
                        paragraph (1) to such credit--
                                  (I) 75 percent of the 
                                tentative minimum tax shall be 
                                substituted for the tentative 
                                minimum tax under subparagraph 
                                (A) thereof, and
                                  (II) the limitation under 
                                paragraph (1) (as modified by 
                                subclause (I)) shall be reduced 
                                by the credit allowed under 
                                subsection (a) for the taxable 
                                year (other than the 
                                empowerment zone employment 
                                credit and the specified 
                                credits).
                  (B) Empowerment zone employment credit.--For 
                purposes of this paragraph, the term 
                ``empowerment zone employment credit'' means 
                the portion of the credit under subsection (a) 
                which is attributable to the credit determined 
                under section 1396 (relating to empowerment 
                zone employment credit).
          (4) Special rules for specified credits.--
                  (A) In general.--In the case of specified 
                credits--
                          (i) this section and section 39 shall 
                        be applied separately with respect to 
                        such credits, and
                          (ii) in applying paragraph (1) to 
                        such credits--
                                  (I) the tentative minimum tax 
                                shall be treated as being zero, 
                                and
                                  (II) the limitation under 
                                paragraph (1) (as modified by 
                                subclause (I)) shall be reduced 
                                by the credit allowed under 
                                subsection (a) for the taxable 
                                year (other than the specified 
                                credits).
                  (B) Specified credits.--For purposes of this 
                subsection, the term ``specified credits'' 
                means--
                          (i) for taxable years beginning after 
                        December 31, 2004, the credit 
                        determined under section 40,
                          (ii) the credit determined under 
                        section 41 for the taxable year with 
                        respect to an eligible small business 
                        (as defined in paragraph (5)(A) after 
                        application of the rules of paragraph 
                        (5)(B)),
                          (iii) the credit determined under 
                        section 42 to the extent attributable 
                        to buildings placed in service after 
                        December 31, 2007,
                          (iv) the credit determined under 
                        section 45 to the extent that such 
                        credit is attributable to electricity 
                        or refined coal produced--
                                  (I) at a facility which is 
                                originally placed in service 
                                after the date of the enactment 
                                of this paragraph, and
                                  (II) during the 4-year period 
                                beginning on the date that such 
                                facility was originally placed 
                                in service,
                          (v) the credit determined under 
                        section 45 to the extent that such 
                        credit is attributable to section 
                        45(e)(10) (relating to Indian coal 
                        production facilities),
                          (vi) the credit determined under 
                        section 45B,
                          (vii) the credit determined under 
                        section 45G,
                          (viii) the credit determined under 
                        section 45R,
                          (ix) the credit determined under 
                        section 45S,
                          (x) the credit determined under 
                        section 46 to the extent that such 
                        credit is attributable to the energy 
                        credit determined under section 48,
                          (xi) the credit determined under 
                        section 46 to the extent that such 
                        credit is attributable to the 
                        rehabilitation credit under section 47, 
                        but only with respect to qualified 
                        rehabilitation expenditures properly 
                        taken into account for periods after 
                        December 31, 2007, and
                          (xii) the credit determined under 
                        section 51.
          (5) Rules related to eligible small businesses.--
                  (A) Eligible small business.--For purposes of 
                this subsection, the term ``eligible small 
                business'' means, with respect to any taxable 
                year--
                          (i) a corporation the stock of which 
                        is not publicly traded,
                          (ii) a partnership, or
                          (iii) a sole proprietorship,
                if the average annual gross receipts of such 
                corporation, partnership, or sole 
                proprietorship for the 3-taxable-year period 
                preceding such taxable year does not exceed 
                $50,000,000. For purposes of applying the test 
                under the preceding sentence, rules similar to 
                the rules of paragraphs (2) and (3) of section 
                448(c) shall apply.
                  (B) Treatment of partners and S corporation 
                shareholders.--For purposes of paragraph 
                (4)(B)(ii), any credit determined under section 
                41 with respect to a partnership or S 
                corporation shall not be treated as a specified 
                credit by any partner or shareholder unless 
                such partner or shareholder meets the gross 
                receipts test under subparagraph (A) for the 
                taxable year in which such credit is treated as 
                a current year business credit.
          (6) Special rules.--
                  (A) Married individuals.--In the case of a 
                [husband or wife who files] married individual 
                who files a separate return, the amount 
                specified under subparagraph (B) of paragraph 
                (1) shall be $12,500 in lieu of $25,000. This 
                subparagraph shall not apply if the spouse of 
                the taxpayer has no business credit 
                carryforward or carryback to, and has no 
                current year business credit for, the taxable 
                year of such spouse which ends within or with 
                the taxpayer's taxable year.
                  (B) Controlled groups.--In the case of a 
                controlled group, the $25,000 amount specified 
                under subparagraph (B) of paragraph (1) shall 
                be reduced for each component member of such 
                group by apportioning $25,000 among the 
                component members of such group in such manner 
                as the Secretary shall by regulations 
                prescribe. For purposes of the preceding 
                sentence, the term ``controlled group'' has the 
                meaning given to such term by section 1563(a).
                  (C) Limitations with respect to certain 
                persons.--In the case of a person described in 
                subparagraph (A) or (B) of section 46(e)(1) (as 
                in effect on the day before the date of the 
                enactment of the Revenue Reconciliation Act of 
                1990), the $25,000 amount specified under 
                subparagraph (B) of paragraph (1) shall equal 
                such person's ratable share (as determined 
                under section 46(e)(2) (as so in effect) of 
                such amount.
                  (D) Estates and trusts.--In the case of an 
                estate or trust, the $25,000 amount specified 
                under subparagraph (B) of paragraph (1) shall 
                be reduced to an amount which bears the same 
                ratio to $25,000 as the portion of the income 
                of the estate or trust which is not allocated 
                to beneficiaries bears to the total income of 
                the estate or trust.
                  (E) Corporations.--In the case of a 
                corporation, this subsection shall be applied 
                by treating the corporation as having a 
                tentative minimum tax of zero.
  (d) Ordering rules.--For purposes of any provision of this 
title where it is necessary to ascertain the extent to which 
the credits determined under any section referred to in 
subsection (b) are used in a taxable year or as a carryback or 
carryforward--
          (1) In general.--The order in which such credits are 
        used shall be determined on the basis of the order in 
        which they are listed in subsection (b) as of the close 
        of the taxable year in which the credit is used.
          (2) Components of investment credit.--The order in 
        which the credits listed in section 46 are used shall 
        be determined on the basis of the order in which such 
        credits are listed in section 46 as of the close of the 
        taxable year in which the credit is used.

           *       *       *       *       *       *       *


SEC. 42. LOW-INCOME HOUSING CREDIT.

  (a) In general.--For purposes of section 38, the amount of 
the low-income housing credit determined under this section for 
any taxable year in the credit period shall be an amount equal 
to--
          (1) the applicable percentage of
          (2) the qualified basis of each qualified low-income 
        building.
  (b) Applicable percentage: 70 percent present value credit 
for certain new buildings; 30 percent present value credit for 
certain other buildings.--
          (1) Determination of applicable percentage.--For 
        purposes of this section--
                  (A) In general.--The term ``applicable 
                percentage'' means, with respect to any 
                building, the appropriate percentage prescribed 
                by the Secretary for the earlier of--
                          (i) the month in which such building 
                        is placed in service, or
                          (ii) at the election of the 
                        taxpayer--
                                  (I) the month in which the 
                                taxpayer and the housing credit 
                                agency enter into an agreement 
                                with respect to such building 
                                (which is binding on such 
                                agency, the taxpayer, and all 
                                successors in interest) as to 
                                the housing credit dollar 
                                amount to be allocated to such 
                                building, or
                                  (II) in the case of any 
                                building to which subsection 
                                (h)(4)(B) applies, the month in 
                                which the tax-exempt 
                                obligations are issued.
                 A month may be elected under clause (ii) only 
                if the election is made not later than the 5th 
                day after the close of such month. Such an 
                election, once made, shall be irrevocable.
                  (B) Method of prescribing percentages.--The 
                percentages prescribed by the Secretary for any 
                month shall be percentages which will yield 
                over a 10-year period amounts of credit under 
                subsection (a) which have a present value equal 
                to--
                          (i) 70 percent of the qualified basis 
                        of a new building which is not 
                        federally subsidized for the taxable 
                        year, and
                          (ii) 30 percent of the qualified 
                        basis of a building not described in 
                        clause (i).
                  (C) Method of discounting.--The present value 
                under subparagraph (B) shall be determined--
                          (i) as of the last day of the 1st 
                        year of the 10-year period referred to 
                        in subparagraph (B),
                          (ii) by using a discount rate equal 
                        to 72 percent of the average of the 
                        annual Federal mid-term rate and the 
                        annual Federal long-term rate 
                        applicable under section 1274(d)(1) to 
                        the month applicable under clause (i) 
                        or (ii) of subparagraph (A) and 
                        compounded annually, and
                          (iii) by assuming that the credit 
                        allowable under this section for any 
                        year is received on the last day of 
                        such year.
          (2) Minimum credit rate for non-federally subsidized 
        new buildings.--In the case of any new building--
                  (A) which is placed in service by the 
                taxpayer after the date of the enactment of 
                this paragraph, and
                  (B) which is not federally subsidized for the 
                taxable year,
        the applicable percentage shall not be less than 9 
        percent.
          (3) Cross references.--
                  (A) For treatment of certain rehabilitation 
                expenditures as separate new buildings, see 
                subsection (e).
                  (B) For determination of applicable 
                percentage for increases in qualified basis 
                after the 1st year of the credit period, see 
                subsection (f)(3).
                  (C) For authority of housing credit agency to 
                limit applicable percentage and qualified basis 
                which may be taken into account under this 
                section with respect to any building, see 
                subsection (h)(7).
  (c) Qualified basis; qualified low-income building.--For 
purposes of this section--
          (1) Qualified basis.--
                  (A) Determination.--The qualified basis of 
                any qualified low-income building for any 
                taxable year is an amount equal to--
                          (i) the applicable fraction 
                        (determined as of the close of such 
                        taxable year) of
                          (ii) the eligible basis of such 
                        building (determined under subsection 
                        (d)(5)).
                  (B) Applicable fraction.--For purposes of 
                subparagraph (A), the term ``applicable 
                fraction'' means the smaller of the unit 
                fraction or the floor space fraction.
                  (C) Unit fraction.--For purposes of 
                subparagraph (B), the term ``unit fraction'' 
                means the fraction--
                          (i) the numerator of which is the 
                        number of low-income units in the 
                        building, and
                          (ii) the denominator of which is the 
                        number of residential rental units 
                        (whether or not occupied) in such 
                        building.
                  (D) Floor space fraction.--For purposes of 
                subparagraph (B), the term ``floor space 
                fraction'' means the fraction--
                          (i) the numerator of which is the 
                        total floor space of the low-income 
                        units in such building, and
                          (ii) the denominator of which is the 
                        total floor space of the residential 
                        rental units (whether or not occupied) 
                        in such building.
                  (E) Qualified basis to include portion of 
                building used to provide supportive services 
                for homeless.--In the case of a qualified low-
                income building described in subsection 
                (i)(3)(B)(iii), the qualified basis of such 
                building for any taxable year shall be 
                increased by the lesser of--
                          (i) so much of the eligible basis of 
                        such building as is used throughout the 
                        year to provide supportive services 
                        designed to assist tenants in locating 
                        and retaining permanent housing, or
                          (ii) 20 percent of the qualified 
                        basis of such building (determined 
                        without regard to this subparagraph).
          (2) Qualified low-income building.--The term 
        ``qualified low-income building'' means any building--
                  (A) which is part of a qualified low-income 
                housing project at all times during the 
                period--
                          (i) beginning on the 1st day in the 
                        compliance period on which such 
                        building is part of such a project, and
                          (ii) ending on the last day of the 
                        compliance period with respect to such 
                        building, and
                  (B) to which the amendments made by section 
                201(a) of the Tax Reform Act of 1986 apply.
  (d) Eligible basis.--For purposes of this section--
          (1) New buildings.--The eligible basis of a new 
        building is its adjusted basis as of the close of the 
        1st taxable year of the credit period.
          (2) Existing buildings.--
                  (A) In general.--The eligible basis of an 
                existing building is--
                          (i) in the case of a building which 
                        meets the requirements of subparagraph 
                        (B), its adjusted basis as of the close 
                        of the 1st taxable year of the credit 
                        period, and
                          (ii) zero in any other case.
                  (B) Requirements.--A building meets the 
                requirements of this subparagraph if--
                          (i) the building is acquired by 
                        purchase (as defined in section 
                        179(d)(2)),
                          (ii) there is a period of at least 10 
                        years between the date of its 
                        acquisition by the taxpayer and the 
                        date the building was last placed in 
                        service,
                          (iii) the building was not previously 
                        placed in service by the taxpayer or by 
                        any person who was a related person 
                        with respect to the taxpayer as of the 
                        time previously placed in service, and
                          (iv) except as provided in subsection 
                        (f)(5), a credit is allowable under 
                        subsection (a) by reason of subsection 
                        (e) with respect to the building.
                  (C) Adjusted basis.--For purposes of 
                subparagraph (A), the adjusted basis of any 
                building shall not include so much of the basis 
                of such building as is determined by reference 
                to the basis of other property held at any time 
                by the person acquiring the building.
                  (D) Special rules for subparagraph (B).--
                          (i) Special rules for certain 
                        transfers.--For purposes of determining 
                        under subparagraph (B)(ii) when a 
                        building was last placed in service, 
                        there shall not be taken into account 
                        any placement in service--
                                  (I) in connection with the 
                                acquisition of the building in 
                                a transaction in which the 
                                basis of the building in the 
                                hands of the person acquiring 
                                it is determined in whole or in 
                                part by reference to the 
                                adjusted basis of such building 
                                in the hands of the person from 
                                whom acquired,
                                  (II) by a person whose basis 
                                in such building is determined 
                                under section 1014(a) (relating 
                                to property acquired from a 
                                decedent),
                                  (III) by any governmental 
                                unit or qualified nonprofit 
                                organization (as defined in 
                                subsection (h)(5)) if the 
                                requirements of subparagraph 
                                (B)(ii) are met with respect to 
                                the placement in service by 
                                such unit or organization and 
                                all the income from such 
                                property is exempt from Federal 
                                income taxation,
                                  (IV) by any person who 
                                acquired such building by 
                                foreclosure (or by instrument 
                                in lieu of foreclosure) of any 
                                purchase-money security 
                                interest held by such person if 
                                the requirements of 
                                subparagraph (B)(ii) are met 
                                with respect to the placement 
                                in service by such person and 
                                such building is resold within 
                                12 months after the date such 
                                building is placed in service 
                                by such person after such 
                                foreclosure, or
                                  (V) of a single-family 
                                residence by any individual who 
                                owned and used such residence 
                                for no other purpose than as 
                                his principal residence.
                          (ii) Related person.--For purposes of 
                        subparagraph (B)(iii), a person 
                        (hereinafter in this subclause referred 
                        to as the ``related person'') is 
                        related to any person if the related 
                        person bears a relationship to such 
                        person specified in section 267(b) or 
                        707(b)(1), or the related person and 
                        such person are engaged in trades or 
                        businesses under common control (within 
                        the meaning of subsections (a) and (b) 
                        of section 52).
          (3) Eligible basis reduced where disproportionate 
        standards for units.--
                  (A) In general.--Except as provided in 
                subparagraph (B), the eligible basis of any 
                building shall be reduced by an amount equal to 
                the portion of the adjusted basis of the 
                building which is attributable to residential 
                rental units in the building which are not low-
                income units and which are above the average 
                quality standard of the low-income units in the 
                building.
                  (B) Exception where taxpayer elects to 
                exclude excess costs.--
                          (i) In general.--Subparagraph (A) 
                        shall not apply with respect to a 
                        residential rental unit in a building 
                        which is not a low-income unit if--
                                  (I) the excess described in 
                                clause (ii) with respect to 
                                such unit is not greater than 
                                15 percent of the cost 
                                described in clause (ii)(II), 
                                and
                                  (II) the taxpayer elects to 
                                exclude from the eligible basis 
                                of such building the excess 
                                described in clause (ii) with 
                                respect to such unit.
                          (ii) Excess.--The excess described in 
                        this clause with respect to any unit is 
                        the excess of--
                                  (I) the cost of such unit, 
                                over
                                  (II) the amount which would 
                                be the cost of such unit if the 
                                average cost per square foot of 
                                low-income units in the 
                                building were substituted for 
                                the cost per square foot of 
                                such unit.
                 The Secretary may by regulation provide for 
                the determination of the excess under this 
                clause on a basis other than square foot costs.
          (4) Special rules relating to determination of 
        adjusted basis.--For purposes of this subsection--
                  (A) In general.--Except as provided in 
                subparagraphs (B) and (C), the adjusted basis 
                of any building shall be determined without 
                regard to the adjusted basis of any property 
                which is not residential rental property.
                  (B) Basis of property in common areas, etc., 
                included.--The adjusted basis of any building 
                shall be determined by taking into account the 
                adjusted basis of property (of a character 
                subject to the allowance for depreciation) used 
                in common areas or provided as comparable 
                amenities to all residential rental units in 
                such building.
                  (C) Inclusion of basis of property used to 
                provide services for certain nontenants.--
                          (i) In general.--The adjusted basis 
                        of any building located in a qualified 
                        census tract (as defined in paragraph 
                        (5)(B)(ii)) shall be determined by 
                        taking into account the adjusted basis 
                        of property (of a character subject to 
                        the allowance for depreciation and not 
                        otherwise taken into account) used 
                        throughout the taxable year in 
                        providing any community service 
                        facility.
                          (ii) Limitation.--The increase in the 
                        adjusted basis of any building which is 
                        taken into account by reason of clause 
                        (i) shall not exceed the sum of--
                                  (I) 25 percent of so much of 
                                the eligible basis of the 
                                qualified low-income housing 
                                project of which it is a part 
                                as does not exceed $15,000,000, 
                                plus
                                  (II) 10 percent of so much of 
                                the eligible basis of such 
                                project as is not taken into 
                                account under subclause (I).
                 For purposes of the preceding sentence, all 
                community service facilities which are part of 
                the same qualified low-income housing project 
                shall be treated as one facility.
                          (iii) Community service facility.--
                        For purposes of this subparagraph, the 
                        term ``community service facility'' 
                        means any facility designed to serve 
                        primarily individuals whose income is 
                        60 percent or less of area median 
                        income (within the meaning of 
                        subsection (g)(1)(B)).
                  (D) No reduction for depreciation.--The 
                adjusted basis of any building shall be 
                determined without regard to paragraphs (2) and 
                (3) of section 1016(a).
          (5) Special rules for determining eligible basis.--
                  (A) Federal grants not taken into account in 
                determining eligible basis.--The eligible basis 
                of a building shall not include any costs 
                financed with the proceeds of a federally 
                funded grant.
                  (B) Increase in credit for buildings in high 
                cost areas.--
                          (i) In general.--In the case of any 
                        building located in a qualified census 
                        tract or difficult development area 
                        which is designated for purposes of 
                        this subparagraph--
                                  (I) in the case of a new 
                                building, the eligible basis of 
                                such building shall be 130 
                                percent of such basis 
                                determined without regard to 
                                this subparagraph, and
                                  (II) in the case of an 
                                existing building, the 
                                rehabilitation expenditures 
                                taken into account under 
                                subsection (e) shall be 130 
                                percent of such expenditures 
                                determined without regard to 
                                this subparagraph.
                          (ii) Qualified census tract.--
                                  (I) In general.--The term 
                                ``qualified census tract'' 
                                means any census tract which is 
                                designated by the Secretary of 
                                Housing and Urban Development 
                                and, for the most recent year 
                                for which census data are 
                                available on household income 
                                in such tract, either in which 
                                50 percent or more of the 
                                households have an income which 
                                is less than 60 percent of the 
                                area median gross income for 
                                such year or which has a 
                                poverty rate of at least 25 
                                percent. If the Secretary of 
                                Housing and Urban Development 
                                determines that sufficient data 
                                for any period are not 
                                available to apply this clause 
                                on the basis of census tracts, 
                                such Secretary shall apply this 
                                clause for such period on the 
                                basis of enumeration districts.
                                  (II) Limit on MSA's 
                                designated.--The portion of a 
                                metropolitan statistical area 
                                which may be designated for 
                                purposes of this subparagraph 
                                shall not exceed an area having 
                                20 percent of the population of 
                                such metropolitan statistical 
                                area.
                                  (III) Determination of 
                                areas.--For purposes of this 
                                clause, each metropolitan 
                                statistical area shall be 
                                treated as a separate area and 
                                all nonmetropolitan areas in a 
                                State shall be treated as 1 
                                area.
                          (iii) Difficult development areas.--
                                  (I) In general.--The term 
                                ``difficult development areas'' 
                                means any area designated by 
                                the Secretary of Housing and 
                                Urban Development as an area 
                                which has high construction, 
                                land, and utility costs 
                                relative to area median gross 
                                income.
                                  (II) Limit on areas 
                                designated.--The portions of 
                                metropolitan statistical areas 
                                which may be designated for 
                                purposes of this subparagraph 
                                shall not exceed an aggregate 
                                area having 20 percent of the 
                                population of such metropolitan 
                                statistical areas. A comparable 
                                rule shall apply to 
                                nonmetropolitan areas.
                          (iv) Special rules and definitions.--
                        For purposes of this subparagraph--
                                  (I) population shall be 
                                determined on the basis of the 
                                most recent decennial census 
                                for which data are available,
                                  (II) area median gross income 
                                shall be determined in 
                                accordance with subsection 
                                (g)(4),
                                  (III) the term ``metropolitan 
                                statistical area'' has the same 
                                meaning as when used in section 
                                143(k)(2)(B), and
                                  (IV) the term 
                                ``nonmetropolitan area'' means 
                                any county (or portion thereof) 
                                which is not within a 
                                metropolitan statistical area.
                          (v) Buildings designated by State 
                        housing credit agency.--Any building 
                        which is designated by the State 
                        housing credit agency as requiring the 
                        increase in credit under this 
                        subparagraph in order for such building 
                        to be financially feasible as part of a 
                        qualified low-income housing project 
                        shall be treated for purposes of this 
                        subparagraph as located in a difficult 
                        development area which is designated 
                        for purposes of this subparagraph. The 
                        preceding sentence shall not apply to 
                        any building if paragraph (1) of 
                        subsection (h) does not apply to any 
                        portion of the eligible basis of such 
                        building by reason of paragraph (4) of 
                        such subsection.
          (6) Credit allowable for certain buildings acquired 
        during 10-year period described in paragraph 
        (2)(B)(ii).--
                  (A) In general.--Paragraph (2)(B)(ii) shall 
                not apply to any federally- or State-assisted 
                building.
                  (B) Buildings acquired from insured 
                depository institutions in default.--On 
                application by the taxpayer, the Secretary may 
                waive paragraph (2)(B)(ii) with respect to any 
                building acquired from an insured depository 
                institution in default (as defined in section 3 
                of the Federal Deposit Insurance Act) or from a 
                receiver or conservator of such an institution.
                  (C) Federally- or State-assisted building.--
                For purposes of this paragraph--
                          (i) Federally-assisted building.--The 
                        term ``federally-assisted building'' 
                        means any building which is 
                        substantially assisted, financed, or 
                        operated under section 8 of the United 
                        States Housing Act of 1937, section 
                        221(d)(3), 221(d)(4), or 236 of the 
                        National Housing Act, section 515 of 
                        the Housing Act of 1949, or any other 
                        housing program administered by the 
                        Department of Housing and Urban 
                        Development or by the Rural Housing 
                        Service of the Department of 
                        Agriculture.
                          (ii) State-assisted building.--The 
                        term ``State-assisted building'' means 
                        any building which is substantially 
                        assisted, financed, or operated under 
                        any State law similar in purposes to 
                        any of the laws referred to in clause 
                        (i).
          (7) Acquisition of building before end of prior 
        compliance period.--
                  (A) In general.--Under regulations prescribed 
                by the Secretary, in the case of a building 
                described in subparagraph (B) (or interest 
                therein) which is acquired by the taxpayer--
                          (i) paragraph (2)(B) shall not apply, 
                        but
                          (ii) the credit allowable by reason 
                        of subsection (a) to the taxpayer for 
                        any period after such acquisition shall 
                        be equal to the amount of credit which 
                        would have been allowable under 
                        subsection (a) for such period to the 
                        prior owner referred to in subparagraph 
                        (B) had such owner not disposed of the 
                        building.
                  (B) Description of building.--A building is 
                described in this subparagraph if--
                          (i) a credit was allowed by reason of 
                        subsection (a) to any prior owner of 
                        such building, and
                          (ii) the taxpayer acquired such 
                        building before the end of the 
                        compliance period for such building 
                        with respect to such prior owner 
                        (determined without regard to any 
                        disposition by such prior owner).
  (e) Rehabilitation expenditures treated as separate new 
building.--
          (1) In general.--Rehabilitation expenditures paid or 
        incurred by the taxpayer with respect to any building 
        shall be treated for purposes of this section as a 
        separate new building.
          (2) Rehabilitation expenditures.--For purposes of 
        paragraph (1)--
                  (A) In general.--The term ``rehabilitation 
                expenditures'' means amounts chargeable to 
                capital account and incurred for property (or 
                additions or improvements to property) of a 
                character subject to the allowance for 
                depreciation in connection with the 
                rehabilitation of a building.
                  (B) Cost of acquisition, etc., not 
                included.--Such term does not include the cost 
                of acquiring any building (or interest therein) 
                or any amount not permitted to be taken into 
                account under paragraph (3) or (4) of 
                subsection (d).
          (3) Minimum expenditures to qualify.--
                  (A) In general.--Paragraph (1) shall apply to 
                rehabilitation expenditures with respect to any 
                building only if--
                          (i) the expenditures are allocable to 
                        1 or more low-income units or 
                        substantially benefit such units, and
                          (ii) the amount of such expenditures 
                        during any 24-month period meets the 
                        requirements of whichever of the 
                        following subclauses requires the 
                        greater amount of such expenditures:
                                  (I) The requirement of this 
                                subclause is met if such amount 
                                is not less than 20 percent of 
                                the adjusted basis of the 
                                building (determined as of the 
                                1st day of such period and 
                                without regard to paragraphs 
                                (2) and (3) of section 
                                1016(a)).
                                  (II) The requirement of this 
                                subclause is met if the 
                                qualified basis attributable to 
                                such amount, when divided by 
                                the number of low-income units 
                                in the building, is $6,000 or 
                                more.
                  (B) Exception from 10 percent 
                rehabilitation.--In the case of a building 
                acquired by the taxpayer from a governmental 
                unit, at the election of the taxpayer, 
                subparagraph (A)(ii)(I) shall not apply and the 
                credit under this section for such 
                rehabilitation expenditures shall be determined 
                using the percentage applicable under 
                subsection (b)(2)(B)(ii).
                  (C) Date of determination.--The determination 
                under subparagraph (A) shall be made as of the 
                close of the 1st taxable year in the credit 
                period with respect to such expenditures.
                  (D) Inflation adjustment.--In the case of any 
                expenditures which are treated under paragraph 
                (4) as placed in service during any calendar 
                year after 2009, the $6,000 amount in 
                subparagraph (A)(ii)(II) shall be increased by 
                an amount equal to--
                          (i) such dollar amount, multiplied by
                          (ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for 
                        such calendar year by substituting 
                        ``calendar year 2008'' for ``calendar 
                        year 2016'' in subparagraph (A)(ii) 
                        thereof.
                Any increase under the preceding sentence which 
                is not a multiple of $100 shall be rounded to 
                the nearest multiple of $100.
          (4) Special rules.--For purposes of applying this 
        section with respect to expenditures which are treated 
        as a separate building by reason of this subsection--
                  (A) such expenditures shall be treated as 
                placed in service at the close of the 24-month 
                period referred to in paragraph (3)(A), and
                  (B) the applicable fraction under subsection 
                (c)(1) shall be the applicable fraction for the 
                building (without regard to paragraph (1)) with 
                respect to which the expenditures were 
                incurred.
        Nothing in subsection (d)(2) shall prevent a credit 
        from being allowed by reason of this subsection.
          (5) No double counting.--Rehabilitation expenditures 
        may, at the election of the taxpayer, be taken into 
        account under this subsection or subsection 
        (d)(2)(A)(i) but not under both such subsections.
          (6) Regulations to apply subsection with respect to 
        group of units in building.--The Secretary may 
        prescribe regulations, consistent with the purposes of 
        this subsection, treating a group of units with respect 
        to which rehabilitation expenditures are incurred as a 
        separate new building.
  (f) Definition and special rules relating to credit period.--
          (1) Credit period defined.--For purposes of this 
        section, the term ``credit period'' means, with respect 
        to any building, the period of 10 taxable years 
        beginning with--
                  (A) the taxable year in which the building is 
                placed in service, or
                  (B) at the election of the taxpayer, the 
                succeeding taxable year,
        but only if the building is a qualified low-income 
        building as of the close of the 1st year of such 
        period. The election under subparagraph (B), once made, 
        shall be irrevocable.
          (2) Special rule for 1st year of credit period.--
                  (A) In general.--The credit allowable under 
                subsection (a) with respect to any building for 
                the 1st taxable year of the credit period shall 
                be determined by substituting for the 
                applicable fraction under subsection (c)(1) the 
                fraction--
                          (i) the numerator of which is the sum 
                        of the applicable fractions determined 
                        under subsection (c)(1) as of the close 
                        of each full month of such year during 
                        which such building was in service, and
                          (ii) the denominator of which is 12.
                  (B) Disallowed 1st year credit allowed in 
                11th year.--Any reduction by reason of 
                subparagraph (A) in the credit allowable 
                (without regard to subparagraph (A)) for the 
                1st taxable year of the credit period shall be 
                allowable under subsection (a) for the 1st 
                taxable year following the credit period.
          (3) Determination of applicable percentage with 
        respect to increases in qualified basis after 1st year 
        of credit period.--
                  (A) In general.--In the case of any building 
                which was a qualified low-income building as of 
                the close of the 1st year of the credit period, 
                if--
                          (i) as of the close of any taxable 
                        year in the compliance period (after 
                        the 1st year of the credit period) the 
                        qualified basis of such building 
                        exceeds
                          (ii) the qualified basis of such 
                        building as of the close of the 1st 
                        year of the credit period,
                the applicable percentage which shall apply 
                under subsection (a) for the taxable year to 
                such excess shall be the percentage equal to 2/
                3 of the applicable percentage which (after the 
                application of subsection (h)) would but for 
                this paragraph apply to such basis.
                  (B) 1st year computation applies.--A rule 
                similar to the rule of paragraph (2)(A) shall 
                apply to any increase in qualified basis to 
                which subparagraph (A) applies for the 1st year 
                of such increase.
          (4) Dispositions of property.--If a building (or an 
        interest therein) is disposed of during any year for 
        which credit is allowable under subsection (a), such 
        credit shall be allocated between the parties on the 
        basis of the number of days during such year the 
        building (or interest) was held by each. In any such 
        case, proper adjustments shall be made in the 
        application of subsection (j).
          (5) Credit period for existing buildings not to begin 
        before rehabilitation credit allowed.--
                  (A) In general.--The credit period for an 
                existing building shall not begin before the 
                1st taxable year of the credit period for 
                rehabilitation expenditures with respect to the 
                building.
                  (B) Acquisition credit allowed for certain 
                buildings not allowed a rehabilitation 
                credit.--
                          (i) In general.--In the case of a 
                        building described in clause (ii)--
                                  (I) subsection (d)(2)(B)(iv) 
                                shall not apply, and
                                  (II) the credit period for 
                                such building shall not begin 
                                before the taxable year which 
                                would be the 1st taxable year 
                                of the credit period for 
                                rehabilitation expenditures 
                                with respect to the building 
                                under the modifications 
                                described in clause (ii)(II).
                          (ii) Building described.--A building 
                        is described in this clause if--
                                  (I) a waiver is granted under 
                                subsection (d)(6)(B) with 
                                respect to the acquisition of 
                                the building, and
                                  (II) a credit would be 
                                allowed for rehabilitation 
                                expenditures with respect to 
                                such building if subsection 
                                (e)(3)(A)(ii)(I) did not apply 
                                and if the dollar amount in 
                                effect under subsection 
                                (e)(3)(A)(ii)(II) were two-
                                thirds of such amount.
  (g) Qualified low-income housing project.--For purposes of 
this section--
          (1) In general.--The term ``qualified low-income 
        housing project'' means any project for residential 
        rental property if the project meets the requirements 
        of subparagraph (A), (B), or (C) whichever is elected 
        by the taxpayer:
                  (A) 20-50 test.--The project meets the 
                requirements of this subparagraph if 20 percent 
                or more of the residential units in such 
                project are both rent-restricted and occupied 
                by individuals whose income is 50 percent or 
                less of area median gross income.
                  (B) 40-60 test.--The project meets the 
                requirements of this subparagraph if 40 percent 
                or more of the residential units in such 
                project are both rent-restricted and occupied 
                by individuals whose income is 60 percent or 
                less of area median gross income.
                  (C) Average income test.--
                          (i) In general.--The project meets 
                        the minimum requirements of this 
                        subparagraph if 40 percent or more (25 
                        percent or more in the case of a 
                        project described in section 142(d)(6)) 
                        of the residential units in such 
                        project are both rent-restricted and 
                        occupied by individuals whose income 
                        does not exceed the imputed income 
                        limitation designated by the taxpayer 
                        with respect to the respective unit.
                          (ii) Special rules relating to income 
                        limitation.--For purposes of clause 
                        (i)--
                                  (I) Designation.--The 
                                taxpayer shall designate the 
                                imputed income limitation of 
                                each unit taken into account 
                                under such clause.
                                  (II) Average test.--The 
                                average of the imputed income 
                                limitations designated under 
                                subclause (I) shall not exceed 
                                60 percent of area median gross 
                                income.
                                  (III) 10-percent 
                                increments.--The designated 
                                imputed income limitation of 
                                any unit under subclause (I) 
                                shall be 20 percent, 30 
                                percent, 40 percent, 50 
                                percent, 60 percent, 70 
                                percent, or 80 percent of area 
                                median gross income.
        Any election under this paragraph, once made, shall be 
        irrevocable. For purposes of this paragraph, any 
        property shall not be treated as failing to be 
        residential rental property merely because part of the 
        building in which such property is located is used for 
        purposes other than residential rental purposes.
          (2) Rent-restricted units.--
                  (A) In general.--For purposes of paragraph 
                (1), a residential unit is rent-restricted if 
                the gross rent with respect to such unit does 
                not exceed 30 percent of the imputed income 
                limitation applicable to such unit. For 
                purposes of the preceding sentence, the amount 
                of the income limitation under paragraph (1) 
                applicable for any period shall not be less 
                than such limitation applicable for the 
                earliest period the building (which contains 
                the unit) was included in the determination of 
                whether the project is a qualified low-income 
                housing project.
                  (B) Gross rent.--For purposes of subparagraph 
                (A), gross rent--
                          (i) does not include any payment 
                        under section 8 of the United States 
                        Housing Act of 1937 or any comparable 
                        rental assistance program (with respect 
                        to such unit or occupants thereof),
                          (ii) includes any utility allowance 
                        determined by the Secretary after 
                        taking into account such determinations 
                        under section 8 of the United States 
                        Housing Act of 1937,
                          (iii) does not include any fee for a 
                        supportive service which is paid to the 
                        owner of the unit (on the basis of the 
                        low-income status of the tenant of the 
                        unit) by any governmental program of 
                        assistance (or by an organization 
                        described in section 501(c)(3) and 
                        exempt from tax under section 501(a)) 
                        if such program (or organization) 
                        provides assistance for rent and the 
                        amount of assistance provided for rent 
                        is not separable from the amount of 
                        assistance provided for supportive 
                        services, and
                          (iv) does not include any rental 
                        payment to the owner of the unit to the 
                        extent such owner pays an equivalent 
                        amount to the Farmers' Home 
                        Administration under section 515 of the 
                        Housing Act of 1949.
                For purposes of clause (iii), the term 
                ``supportive service'' means any service 
                provided under a planned program of services 
                designed to enable residents of a residential 
                rental property to remain independent and avoid 
                placement in a hospital, nursing home, or 
                intermediate care facility for the mentally or 
                physically handicapped. In the case of a 
                single-room occupancy unit or a building 
                described in subsection (i)(3)(B)(iii), such 
                term includes any service provided to assist 
                tenants in locating and retaining permanent 
                housing.
                  (C) Imputed income limitation applicable to 
                unit.--For purposes of this paragraph, the 
                imputed income limitation applicable to a unit 
                is the income limitation which would apply 
                under paragraph (1) to individuals occupying 
                the unit if the number of individuals occupying 
                the unit were as follows:
                          (i) In the case of a unit which does 
                        not have a separate bedroom, 1 
                        individual.
                          (ii) In the case of a unit which has 
                        1 or more separate bedrooms, 1.5 
                        individuals for each separate bedroom.
                In the case of a project with respect to which 
                a credit is allowable by reason of this section 
                and for which financing is provided by a bond 
                described in section 142(a)(7), the imputed 
                income limitation shall apply in lieu of the 
                otherwise applicable income limitation for 
                purposes of applying section 142(d)(4)(B)(ii).
                  (D) Treatment of units occupied by 
                individuals whose incomes rise above limit.--
                          (i) In general.--Except as provided 
                        in clauses (ii), (iii), and (iv), 
                        notwithstanding an increase in the 
                        income of the occupants of a low-income 
                        unit above the income limitation 
                        applicable under paragraph (1), such 
                        unit shall continue to be treated as a 
                        low-income unit if the income of such 
                        occupants initially met such income 
                        limitation and such unit continues to 
                        be rent-restricted.
                          (ii) Rental of next available unit in 
                        case of 20-50 or 40-60 test.--In the 
                        case of a project with respect to which 
                        the taxpayer elects the requirements of 
                        subparagraph (A) or (B) of paragraph 
                        (1), if the income of the occupants of 
                        the unit increases above 140 percent of 
                        the income limitation applicable under 
                        paragraph (1), clause (i) shall cease 
                        to apply to such unit if any 
                        residential rental unit in the building 
                        (of a size comparable to, or smaller 
                        than, such unit) is occupied by a new 
                        resident whose income exceeds such 
                        income limitation.
                          (iii) Rental of next available unit 
                        in case of average income test.--In the 
                        case of a project with respect to which 
                        the taxpayer elects the requirements of 
                        subparagraph (C) of paragraph (1), if 
                        the income of the occupants of the unit 
                        increases above 140 percent of the 
                        greater of--
                                  (I) 60 percent of area median 
                                gross income, or
                                  (II) the imputed income 
                                limitation designated with 
                                respect to the unit under 
                                paragraph (1)(C)(ii)(I),
                 clause (i) shall cease to apply to any such 
                unit if any residential rental unit in the 
                building (of a size comparable to, or smaller 
                than, such unit) is occupied by a new resident 
                whose income exceeds the limitation described 
                in clause (v).
                          (iv) Deep rent skewed projects.--In 
                        the case of a project described in 
                        section 142(d)(4)(B), clause (ii) or 
                        (iii), whichever is applicable, shall 
                        be applied by substituting ``170 
                        percent'' for ``140 percent'', and--
                                  (I) in the case of clause 
                                (ii), by substituting ``any 
                                low-income unit in the building 
                                is occupied by a new resident 
                                whose income exceeds 40 percent 
                                of area median gross income'' 
                                for ``any residential rental 
                                unit'' and all that follows in 
                                such clause, and
                                  (II) in the case of clause 
                                (iii), by substituting ``any 
                                low-income unit in the building 
                                is occupied by a new resident 
                                whose income exceeds the lesser 
                                of 40 percent of area median 
                                gross income or the imputed 
                                income limitation designated 
                                with respect to such unit under 
                                paragraph (1)(C)(ii)(I)'' for 
                                ``any residential rental unit'' 
                                and all that follows in such 
                                clause.
                          (v) Limitation described.--For 
                        purposes of clause (iii), the 
                        limitation described in this clause 
                        with respect to any unit is--
                                  (I) the imputed income 
                                limitation designated with 
                                respect to such unit under 
                                paragraph (1)(C)(ii)(I), in the 
                                case of a unit which was taken 
                                into account as a low-income 
                                unit prior to becoming vacant, 
                                and
                                  (II) the imputed income 
                                limitation which would have to 
                                be designated with respect to 
                                such unit under such paragraph 
                                in order for the project to 
                                continue to meet the 
                                requirements of paragraph 
                                (1)(C)(ii)(II), in the case of 
                                any other unit.
                  (E) Units where Federal rental assistance is 
                reduced as tenant's income increases.--If the 
                gross rent with respect to a residential unit 
                exceeds the limitation under subparagraph (A) 
                by reason of the fact that the income of the 
                occupants thereof exceeds the income limitation 
                applicable under paragraph (1), such unit 
                shall, nevertheless, be treated as a rent-
                restricted unit for purposes of paragraph (1) 
                if--
                          (i) a Federal rental assistance 
                        payment described in subparagraph 
                        (B)(i) is made with respect to such 
                        unit or its occupants, and
                          (ii) the sum of such payment and the 
                        gross rent with respect to such unit 
                        does not exceed the sum of the amount 
                        of such payment which would be made and 
                        the gross rent which would be payable 
                        with respect to such unit if--
                                  (I) the income of the 
                                occupants thereof did not 
                                exceed the income limitation 
                                applicable under paragraph (1), 
                                and
                                  (II) such units were rent-
                                restricted within the meaning 
                                of subparagraph (A).
                The preceding sentence shall apply to any unit 
                only if the result described in clause (ii) is 
                required by Federal statute as of the date of 
                the enactment of this subparagraph and as of 
                the date the Federal rental assistance payment 
                is made.
          (3) Date for meeting requirements.--
                  (A) In general.--Except as otherwise provided 
                in this paragraph, a building shall be treated 
                as a qualified low-income building only if the 
                project (of which such building is a part) 
                meets the requirements of paragraph (1) not 
                later than the close of the 1st year of the 
                credit period for such building.
                  (B) Buildings which rely on later buildings 
                for qualification.--
                          (i) In general.--In determining 
                        whether a building (hereinafter in this 
                        subparagraph referred to as the ``prior 
                        building'') is a qualified low-income 
                        building, the taxpayer may take into 
                        account 1 or more additional buildings 
                        placed in service during the 12-month 
                        period described in subparagraph (A) 
                        with respect to the prior building only 
                        if the taxpayer elects to apply clause 
                        (ii) with respect to each additional 
                        building taken into account.
                          (ii) Treatment of elected 
                        buildings.--In the case of a building 
                        which the taxpayer elects to take into 
                        account under clause (i), the period 
                        under subparagraph (A) for such 
                        building shall end at the close of the 
                        12-month period applicable to the prior 
                        building.
                          (iii) Date prior building is treated 
                        as placed in service.--For purposes of 
                        determining the credit period and the 
                        compliance period for the prior 
                        building, the prior building shall be 
                        treated for purposes of this section as 
                        placed in service on the most recent 
                        date any additional building elected by 
                        the taxpayer (with respect to such 
                        prior building) was placed in service.
                  (C) Special rule.--A building--
                          (i) other than the 1st building 
                        placed in service as part of a project, 
                        and
                          (ii) other than a building which is 
                        placed in service during the 12-month 
                        period described in subparagraph (A) 
                        with respect to a prior building which 
                        becomes a qualified low-income 
                        building,
                shall in no event be treated as a qualified 
                low-income building unless the project is a 
                qualified low-income housing project (without 
                regard to such building) on the date such 
                building is placed in service.
                  (D) Projects with more than 1 building must 
                be identified.--For purposes of this section, a 
                project shall be treated as consisting of only 
                1 building unless, before the close of the 1st 
                calendar year in the project period (as defined 
                in subsection (h)(1)(F)(ii)), each building 
                which is (or will be) part of such project is 
                identified in such form and manner as the 
                Secretary may provide.
          (4) Certain rules made applicable.--Paragraphs (2) 
        (other than subparagraph (A) thereof), (3), (4), (5), 
        (6), and (7) of section 142(d), and section 6652(j), 
        shall apply for purposes of determining whether any 
        project is a qualified low-income housing project and 
        whether any unit is a low-income unit; except that, in 
        applying such provisions for such purposes, the term 
        ``gross rent'' shall have the meaning given such term 
        by paragraph (2)(B) of this subsection.
          (5) Election to treat building after compliance 
        period as not part of a project.--For purposes of this 
        section, the taxpayer may elect to treat any building 
        as not part of a qualified low-income housing project 
        for any period beginning after the compliance period 
        for such building.
          (6) Special rule where de minimis equity 
        contribution.--Property shall not be treated as failing 
        to be residential rental property for purposes of this 
        section merely because the occupant of a residential 
        unit in the project pays (on a voluntary basis) to the 
        lessor a de minimis amount to be held toward the 
        purchase by such occupant of a residential unit in such 
        project if--
                  (A) all amounts so paid are refunded to the 
                occupant on the cessation of his occupancy of a 
                unit in the project, and
                  (B) the purchase of the unit is not permitted 
                until after the close of the compliance period 
                with respect to the building in which the unit 
                is located.
        Any amount paid to the lessor as described in the 
        preceding sentence shall be included in gross rent 
        under paragraph (2) for purposes of determining whether 
        the unit is rent-restricted.
          (7) Scattered site projects.--Buildings which would 
        (but for their lack of proximity) be treated as a 
        project for purposes of this section shall be so 
        treated if all of the dwelling units in each of the 
        buildings are rent-restricted (within the meaning of 
        paragraph (2)) residential rental units.
          (8) Waiver of certain de minimis errors and 
        recertifications.--On application by the taxpayer, the 
        Secretary may waive--
                  (A) any recapture under subsection (j) in the 
                case of any de minimis error in complying with 
                paragraph (1), or
                  (B) any annual recertification of tenant 
                income for purposes of this subsection, if the 
                entire building is occupied by low-income 
                tenants.
          (9) Clarification of general public use 
        requirement.--A project does not fail to meet the 
        general public use requirement solely because of 
        occupancy restrictions or preferences that favor 
        tenants--
                  (A) with special needs,
                  (B) who are members of a specified group 
                under a Federal program or State program or 
                policy that supports housing for such a 
                specified group, or
                  (C) who are involved in artistic or literary 
                activities.
  (h) Limitation on aggregate credit allowable with respect to 
projects located in a State.--
          (1) Credit may not exceed credit amount allocated to 
        building.--
                  (A) In general.--The amount of the credit 
                determined under this section for any taxable 
                year with respect to any building shall not 
                exceed the housing credit dollar amount 
                allocated to such building under this 
                subsection.
                  (B) Time for making allocation.--Except in 
                the case of an allocation which meets the 
                requirements of subparagraph (C), (D), (E), or 
                (F), an allocation shall be taken into account 
                under subparagraph (A) only if it is made not 
                later than the close of the calendar year in 
                which the building is placed in service.
                  (C) Exception where binding commitment.--An 
                allocation meets the requirements of this 
                subparagraph if there is a binding commitment 
                (not later than the close of the calendar year 
                in which the building is placed in service) by 
                the housing credit agency to allocate a 
                specified housing credit dollar amount to such 
                building beginning in a specified later taxable 
                year.
                  (D) Exception where increase in qualified 
                basis.--
                          (i) In general.--An allocation meets 
                        the requirements of this subparagraph 
                        if such allocation is made not later 
                        than the close of the calendar year in 
                        which ends the taxable year to which it 
                        will 1st apply but only to the extent 
                        the amount of such allocation does not 
                        exceed the limitation under clause 
                        (ii).
                          (ii) Limitation.--The limitation 
                        under this clause is the amount of 
                        credit allowable under this section 
                        (without regard to this subsection) for 
                        a taxable year with respect to an 
                        increase in the qualified basis of the 
                        building equal to the excess of--
                                  (I) the qualified basis of 
                                such building as of the close 
                                of the 1st taxable year to 
                                which such allocation will 
                                apply, over
                                  (II) the qualified basis of 
                                such building as of the close 
                                of the 1st taxable year to 
                                which the most recent prior 
                                housing credit allocation with 
                                respect to such building 
                                applied.
                          (iii) Housing credit dollar amount 
                        reduced by full allocation.--
                        Notwithstanding clause (i), the full 
                        amount of the allocation shall be taken 
                        into account under paragraph (2).
                  (E) Exception where 10 percent of cost 
                incurred.--
                          (i) In general.--An allocation meets 
                        the requirements of this subparagraph 
                        if such allocation is made with respect 
                        to a qualified building which is placed 
                        in service not later than the close of 
                        the second calendar year following the 
                        calendar year in which the allocation 
                        is made.
                          (ii) Qualified building.--For 
                        purposes of clause (i), the term 
                        ``qualified building'' means any 
                        building which is part of a project if 
                        the taxpayer's basis in such project 
                        (as of the date which is 1 year after 
                        the date that the allocation was made) 
                        is more than 10 percent of the 
                        taxpayer's reasonably expected basis in 
                        such project (as of the close of the 
                        second calendar year referred to in 
                        clause (i)). Such term does not include 
                        any existing building unless a credit 
                        is allowable under subsection (e) for 
                        rehabilitation expenditures paid or 
                        incurred by the taxpayer with respect 
                        to such building for a taxable year 
                        ending during the second calendar year 
                        referred to in clause (i) or the prior 
                        taxable year.
                  (F) Allocation of credit on a project 
                basis.--
                          (i) In general.--In the case of a 
                        project which includes (or will 
                        include) more than 1 building, an 
                        allocation meets the requirements of 
                        this subparagraph if--
                                  (I) the allocation is made to 
                                the project for a calendar year 
                                during the project period,
                                  (II) the allocation only 
                                applies to buildings placed in 
                                service during or after the 
                                calendar year for which the 
                                allocation is made, and
                                  (III) the portion of such 
                                allocation which is allocated 
                                to any building in such project 
                                is specified not later than the 
                                close of the calendar year in 
                                which the building is placed in 
                                service.
                          (ii) Project period.--For purposes of 
                        clause (i), the term ``project period'' 
                        means the period--
                                  (I) beginning with the 1st 
                                calendar year for which an 
                                allocation may be made for the 
                                1st building placed in service 
                                as part of such project, and
                                  (II) ending with the calendar 
                                year the last building is 
                                placed in service as part of 
                                such project.
          (2) Allocated credit amount to apply to all taxable 
        years ending during or after credit allocation year.--
        Any housing credit dollar amount allocated to any 
        building for any calendar year--
                  (A) shall apply to such building for all 
                taxable years in the compliance period ending 
                during or after such calendar year, and
                  (B) shall reduce the aggregate housing credit 
                dollar amount of the allocating agency only for 
                such calendar year.
          (3) Housing credit dollar amount for agencies.--
                  (A) In general.--The aggregate housing credit 
                dollar amount which a housing credit agency may 
                allocate for any calendar year is the portion 
                of the State housing credit ceiling allocated 
                under this paragraph for such calendar year to 
                such agency.
                  (B) State ceiling initially allocated to 
                State housing credit agencies.--Except as 
                provided in subparagraphs (D) and (E), the 
                State housing credit ceiling for each calendar 
                year shall be allocated to the housing credit 
                agency of such State. If there is more than 1 
                housing credit agency of a State, all such 
                agencies shall be treated as a single agency.
                  (C) State housing credit ceiling.--The State 
                housing credit ceiling applicable to any State 
                for any calendar year shall be an amount equal 
                to the sum of--
                          (i) the unused State housing credit 
                        ceiling (if any) of such State for the 
                        preceding calendar year,
                          (ii) the greater of--
                                  (I) $1.75 multiplied by the 
                                State population, or
                                  (II) $2,000,000,
                          (iii) the amount of State housing 
                        credit ceiling returned in the calendar 
                        year, plus
                          (iv) the amount (if any) allocated 
                        under subparagraph (D) to such State by 
                        the Secretary.
                For purposes of clause (i), the unused State 
                housing credit ceiling for any calendar year is 
                the excess (if any) of the sum of the amounts 
                described in clauses (ii) through (iv) over the 
                aggregate housing credit dollar amount 
                allocated for such year. For purposes of clause 
                (iii), the amount of State housing credit 
                ceiling returned in the calendar year equals 
                the housing credit dollar amount previously 
                allocated within the State to any project which 
                fails to meet the 10 percent test under 
                paragraph (1)(E)(ii) on a date after the close 
                of the calendar year in which the allocation 
                was made or which does not become a qualified 
                low-income housing project within the period 
                required by this section or the terms of the 
                allocation or to any project with respect to 
                which an allocation is cancelled by mutual 
                consent of the housing credit agency and the 
                allocation recipient.
                  (D) Unused housing credit carryovers 
                allocated among certain States.--
                          (i) In general.--The unused housing 
                        credit carryover of a State for any 
                        calendar year shall be assigned to the 
                        Secretary for allocation among 
                        qualified States for the succeeding 
                        calendar year.
                          (ii) Unused housing credit 
                        carryover.--For purposes of this 
                        subparagraph, the unused housing credit 
                        carryover of a State for any calendar 
                        year is the excess (if any) of--
                                  (I) the unused State housing 
                                credit ceiling for the year 
                                preceding such year, over
                                  (II) the aggregate housing 
                                credit dollar amount allocated 
                                for such year.
                          (iii) Formula for allocation of 
                        unused housing credit carryovers among 
                        qualified States.--The amount allocated 
                        under this subparagraph to a qualified 
                        State for any calendar year shall be 
                        the amount determined by the Secretary 
                        to bear the same ratio to the aggregate 
                        unused housing credit carryovers of all 
                        States for the preceding calendar year 
                        as such State's population for the 
                        calendar year bears to the population 
                        of all qualified States for the 
                        calendar year. For purposes of the 
                        preceding sentence, population shall be 
                        determined in accordance with section 
                        146(j).
                          (iv) Qualified State.--For purposes 
                        of this subparagraph, the term 
                        ``qualified State'' means, with respect 
                        to a calendar year, any State--
                                  (I) which allocated its 
                                entire State housing credit 
                                ceiling for the preceding 
                                calendar year, and
                                  (II) for which a request is 
                                made (not later than May 1 of 
                                the calendar year) to receive 
                                an allocation under clause 
                                (iii).
                  (E) Special rule for States with 
                constitutional home rule cities.--For purposes 
                of this subsection--
                          (i) In general.--The aggregate 
                        housing credit dollar amount for any 
                        constitutional home rule city for any 
                        calendar year shall be an amount which 
                        bears the same ratio to the State 
                        housing credit ceiling for such 
                        calendar year as--
                                  (I) the population of such 
                                city, bears to
                                  (II) the population of the 
                                entire State.
                          (ii) Coordination with other 
                        allocations.--In the case of any State 
                        which contains 1 or more constitutional 
                        home rule cities, for purposes of 
                        applying this paragraph with respect to 
                        housing credit agencies in such State 
                        other than constitutional home rule 
                        cities, the State housing credit 
                        ceiling for any calendar year shall be 
                        reduced by the aggregate housing credit 
                        dollar amounts determined for such year 
                        for all constitutional home rule cities 
                        in such State.
                          (iii) Constitutional home rule 
                        city.--For purposes of this paragraph, 
                        the term ``constitutional home rule 
                        city'' has the meaning given such term 
                        by section 146(d)(3)(C).
                  (F) State may provide for different 
                allocation.--Rules similar to the rules of 
                section 146(e) (other than paragraph (2)(B) 
                thereof) shall apply for purposes of this 
                paragraph.
                  (G) Population.--For purposes of this 
                paragraph, population shall be determined in 
                accordance with section 146(j).
                  (H) Cost-of-living adjustment.--
                          (i) In general.--In the case of a 
                        calendar year after 2002, the 
                        $2,000,000 and $1.75 amounts in 
                        subparagraph (C) shall each be 
                        increased by an amount equal to--
                                  (I) such dollar amount, 
                                multiplied by
                                  (II) the cost-of-living 
                                adjustment determined under 
                                section 1(f)(3) for such 
                                calendar year by substituting 
                                ``calendar year 2001'' for 
                                ``calendar year 2016'' in 
                                subparagraph (A)(ii) thereof.
                          (ii) Rounding.--(I) In the case of 
                        the $2,000,000 amount, any increase 
                        under clause (i) which is not a 
                        multiple of $5,000 shall be rounded to 
                        the next lowest multiple of $5,000.
                          (II) In the case of the $1.75 amount, 
                        any increase under clause (i) which is 
                        not a multiple of 5 cents shall be 
                        rounded to the next lowest multiple of 
                        5 cents.
                  (I) Increase in State housing credit ceiling 
                for 2018, 2019, 2020, and 2021.--In the case of 
                calendar years 2018, 2019, 2020, and 2021, each 
                of the dollar amounts in effect under clauses 
                (I) and (II) of subparagraph (C)(ii) for any 
                calendar year (after any increase under 
                subparagraph (H)) shall be increased by 
                multiplying such dollar amount by 1.125.
          (4) Credit for buildings financed by tax-exempt bonds 
        subject to volume cap not taken into account.--
                  (A) In general.--Paragraph (1) shall not 
                apply to the portion of any credit allowable 
                under subsection (a) which is attributable to 
                eligible basis financed by any obligation the 
                interest on which is exempt from tax under 
                section 103 if--
                          (i) such obligation is taken into 
                        account under section 146, and
                          (ii) principal payments on such 
                        financing are applied within a 
                        reasonable period to redeem obligations 
                        the proceeds of which were used to 
                        provide such financing or such 
                        financing is refunded as described in 
                        section 146(i)(6).
                  (B) Special rule where 50 percent or more of 
                building is financed with tax-exempt bonds 
                subject to volume cap.--For purposes of 
                subparagraph (A), if 50 percent or more of the 
                aggregate basis of any building and the land on 
                which the building is located is financed by 
                any obligation described in subparagraph (A), 
                paragraph (1) shall not apply to any portion of 
                the credit allowable under subsection (a) with 
                respect to such building.
          (5) Portion of State ceiling set-aside for certain 
        projects involving qualified nonprofit organizations.--
                  (A) In general.--Not more than 90 percent of 
                the State housing credit ceiling for any State 
                for any calendar year shall be allocated to 
                projects other than qualified low-income 
                housing projects described in subparagraph (B).
                  (B) Projects involving qualified nonprofit 
                organizations.--For purposes of subparagraph 
                (A), a qualified low-income housing project is 
                described in this subparagraph if a qualified 
                nonprofit organization is to own an interest in 
                the project (directly or through a partnership) 
                and materially participate (within the meaning 
                of section 469(h)) in the development and 
                operation of the project throughout the 
                compliance period.
                  (C) Qualified nonprofit organization.--For 
                purposes of this paragraph, the term 
                ``qualified nonprofit organization'' means any 
                organization if--
                          (i) such organization is described in 
                        paragraph (3) or (4) of section 501(c) 
                        and is exempt from tax under section 
                        501(a),
                          (ii) such organization is determined 
                        by the State housing credit agency not 
                        to be affiliated with or controlled by 
                        a for-profit organization, and
                          (iii) 1 of the exempt purposes of 
                        such organization includes the 
                        fostering of low-income housing.
                  (D) Treatment of certain subsidiaries.--
                          (i) In general.--For purposes of this 
                        paragraph, a qualified nonprofit 
                        organization shall be treated as 
                        satisfying the ownership and material 
                        participation test of subparagraph (B) 
                        if any qualified corporation in which 
                        such organization holds stock satisfies 
                        such test.
                          (ii) Qualified corporation.--For 
                        purposes of clause (i), the term 
                        ``qualified corporation'' means any 
                        corporation if 100 percent of the stock 
                        of such corporation is held by 1 or 
                        more qualified nonprofit organizations 
                        at all times during the period such 
                        corporation is in existence.
                  (E) State may not override set-aside.--
                Nothing in subparagraph (F) of paragraph (3) 
                shall be construed to permit a State not to 
                comply with subparagraph (A) of this paragraph.
          (6) Buildings eligible for credit only if minimum 
        long-term commitment to low-income housing.--
                  (A) In general.--No credit shall be allowed 
                by reason of this section with respect to any 
                building for the taxable year unless an 
                extended low-income housing commitment is in 
                effect as of the end of such taxable year.
                  (B) Extended low-income housing commitment.--
                For purposes of this paragraph, the term 
                ``extended low-income housing commitment'' 
                means any agreement between the taxpayer and 
                the housing credit agency--
                          (i) which requires that the 
                        applicable fraction (as defined in 
                        subsection (c)(1)) for the building for 
                        each taxable year in the extended use 
                        period will not be less than the 
                        applicable fraction specified in such 
                        agreement and which prohibits the 
                        actions described in subclauses (I) and 
                        (II) of subparagraph (E)(ii),
                          (ii) which allows individuals who 
                        meet the income limitation applicable 
                        to the building under subsection (g) 
                        (whether prospective, present, or 
                        former occupants of the building) the 
                        right to enforce in any State court the 
                        requirement and prohibitions of clause 
                        (i),
                          (iii) which prohibits the disposition 
                        to any person of any portion of the 
                        building to which such agreement 
                        applies unless all of the building to 
                        which such agreement applies is 
                        disposed of to such person,
                          (iv) which prohibits the refusal to 
                        lease to a holder of a voucher or 
                        certificate of eligibility under 
                        section 8 of the United States Housing 
                        Act of 1937 because of the status of 
                        the prospective tenant as such a 
                        holder,
                          (v) which is binding on all 
                        successors of the taxpayer, and
                          (vi) which, with respect to the 
                        property, is recorded pursuant to State 
                        law as a restrictive covenant.
                  (C) Allocation of credit may not exceed 
                amount necessary to support commitment.--
                          (i) In general.--The housing credit 
                        dollar amount allocated to any building 
                        may not exceed the amount necessary to 
                        support the applicable fraction 
                        specified in the extended low-income 
                        housing commitment for such building, 
                        including any increase in such fraction 
                        pursuant to the application of 
                        subsection (f)(3) if such increase is 
                        reflected in an amended low-income 
                        housing commitment.
                          (ii) Buildings financed by tax-exempt 
                        bonds.--If paragraph (4) applies to any 
                        building the amount of credit allowed 
                        in any taxable year may not exceed the 
                        amount necessary to support the 
                        applicable fraction specified in the 
                        extended low-income housing commitment 
                        for such building. Such commitment may 
                        be amended to increase such fraction.
                  (D) Extended use period.--For purposes of 
                this paragraph, the term ``extended use 
                period'' means the period--
                          (i) beginning on the 1st day in the 
                        compliance period on which such 
                        building is part of a qualified low-
                        income housing project, and
                          (ii) ending on the later of--
                                  (I) the date specified by 
                                such agency in such agreement, 
                                or
                                  (II) the date which is 15 
                                years after the close of the 
                                compliance period.
                  (E) Exceptions if foreclosure or if no buyer 
                willing to maintain low-income status.--
                          (i) In general.--The extended use 
                        period for any building shall 
                        terminate--
                                  (I) on the date the building 
                                is acquired by foreclosure (or 
                                instrument in lieu of 
                                foreclosure) unless the 
                                Secretary determines that such 
                                acquisition is part of an 
                                arrangement with the taxpayer a 
                                purpose of which is to 
                                terminate such period, or
                                  (II) on the last day of the 
                                period specified in 
                                subparagraph (I) if the housing 
                                credit agency is unable to 
                                present during such period a 
                                qualified contract for the 
                                acquisition of the low-income 
                                portion of the building by any 
                                person who will continue to 
                                operate such portion as a 
                                qualified low-income building.
                 Subclause (II) shall not apply to the extent 
                more stringent requirements are provided in the 
                agreement or in State law.
                          (ii) Eviction, etc. of existing low-
                        income tenants not permitted.--The 
                        termination of an extended use period 
                        under clause (i) shall not be construed 
                        to permit before the close of the 3-
                        year period following such 
                        termination--
                                  (I) the eviction or the 
                                termination of tenancy (other 
                                than for good cause) of an 
                                existing tenant of any low-
                                income unit, or
                                  (II) any increase in the 
                                gross rent with respect to such 
                                unit not otherwise permitted 
                                under this section.
                  (F) Qualified contract.--For purposes of 
                subparagraph (E), the term ``qualified 
                contract'' means a bona fide contract to 
                acquire (within a reasonable period after the 
                contract is entered into) the nonlow-income 
                portion of the building for fair market value 
                and the low-income portion of the building for 
                an amount not less than the applicable fraction 
                (specified in the extended low-income housing 
                commitment) of--
                          (i) the sum of--
                                  (I) the outstanding 
                                indebtedness secured by, or 
                                with respect to, the building,
                                  (II) the adjusted investor 
                                equity in the building, plus
                                  (III) other capital 
                                contributions not reflected in 
                                the amounts described in 
                                subclause (I) or (II), reduced 
                                by
                          (ii) cash distributions from (or 
                        available for distribution from) the 
                        project.
                The Secretary shall prescribe such regulations 
                as may be necessary or appropriate to carry out 
                this paragraph, including regulations to 
                prevent the manipulation of the amount 
                determined under the preceding sentence.
                  (G) Adjusted investor equity.--
                          (i) In general.--For purposes of 
                        subparagraph (E), the term ``adjusted 
                        investor equity'' means, with respect 
                        to any calendar year, the aggregate 
                        amount of cash taxpayers invested with 
                        respect to the project increased by the 
                        amount equal to--
                                  (I) such amount, multiplied 
                                by
                                  (II) the cost-of-living 
                                adjustment for such calendar 
                                year, determined under section 
                                1(f)(3) by substituting the 
                                base calendar year for 
                                ``calendar year 2016'' in 
                                subparagraph (A)(ii) thereof.
                 An amount shall be taken into account as an 
                investment in the project only to the extent 
                there was an obligation to invest such amount 
                as of the beginning of the credit period and to 
                the extent such amount is reflected in the 
                adjusted basis of the project.
                          (ii) Cost-of-living increases in 
                        excess of 5 percent not taken into 
                        account.--Under regulations prescribed 
                        by the Secretary, if the C-CPI-U for 
                        any calendar year (as defined in 
                        section 1(f)(6)) exceeds the C-CPI-U 
                        for the preceding calendar year by more 
                        than 5 percent, the C-CPI-U for the 
                        base calendar year shall be increased 
                        such that such excess shall never be 
                        taken into account under clause (i). In 
                        the case of a base calendar year before 
                        2017, the C-CPI-U for such year shall 
                        be determined by multiplying the CPI 
                        for such year by the amount determined 
                        under section 1(f)(3)(B).
                          (iii) Base calendar year.--For 
                        purposes of this subparagraph, the term 
                        ``base calendar year'' means the 
                        calendar year with or within which the 
                        1st taxable year of the credit period 
                        ends.
                  (H) Low-income portion.--For purposes of this 
                paragraph, the low-income portion of a building 
                is the portion of such building equal to the 
                applicable fraction specified in the extended 
                low-income housing commitment for the building.
                  (I) Period for finding buyer.--The period 
                referred to in this subparagraph is the 1-year 
                period beginning on the date (after the 14th 
                year of the compliance period) the taxpayer 
                submits a written request to the housing credit 
                agency to find a person to acquire the 
                taxpayer's interest in the low-income portion 
                of the building.
                  (J) Effect of noncompliance.--If, during a 
                taxable year, there is a determination that an 
                extended low-income housing agreement was not 
                in effect as of the beginning of such year, 
                such determination shall not apply to any 
                period before such year and subparagraph (A) 
                shall be applied without regard to such 
                determination if the failure is corrected 
                within 1 year from the date of the 
                determination.
                  (K) Projects which consist of more than 1 
                building.--The application of this paragraph to 
                projects which consist of more than 1 building 
                shall be made under regulations prescribed by 
                the Secretary.
          (7) Special rules.--
                  (A) Building must be located within 
                jurisdiction of credit agency.--A housing 
                credit agency may allocate its aggregate 
                housing credit dollar amount only to buildings 
                located in the jurisdiction of the governmental 
                unit of which such agency is a part.
                  (B) Agency allocations in excess of limit.--
                If the aggregate housing credit dollar amounts 
                allocated by a housing credit agency for any 
                calendar year exceed the portion of the State 
                housing credit ceiling allocated to such agency 
                for such calendar year, the housing credit 
                dollar amounts so allocated shall be reduced 
                (to the extent of such excess) for buildings in 
                the reverse of the order in which the 
                allocations of such amounts were made.
                  (C) Credit reduced if allocated credit dollar 
                amount is less than credit which would be 
                allowable without regard to placed in service 
                convention, etc..--
                          (i) In general.--The amount of the 
                        credit determined under this section 
                        with respect to any building shall not 
                        exceed the clause (ii) percentage of 
                        the amount of the credit which would 
                        (but for this subparagraph) be 
                        determined under this section with 
                        respect to such building.
                          (ii) Determination of percentage.--
                        For purposes of clause (i), the clause 
                        (ii) percentage with respect to any 
                        building is the percentage which--
                                  (I) the housing credit dollar 
                                amount allocated to such 
                                building bears to
                                  (II) the credit amount 
                                determined in accordance with 
                                clause (iii).
                          (iii) Determination of credit 
                        amount.--The credit amount determined 
                        in accordance with this clause is the 
                        amount of the credit which would (but 
                        for this subparagraph) be determined 
                        under this section with respect to the 
                        building if--
                                  (I) this section were applied 
                                without regard to paragraphs 
                                (2)(A) and (3)(B) of subsection 
                                (f), and
                                  (II) subsection (f)(3)(A) 
                                were applied without regard to 
                                ``the percentage equal to 2/3 
                                of''.
                  (D) Housing credit agency to specify 
                applicable percentage and maximum qualified 
                basis.--In allocating a housing credit dollar 
                amount to any building, the housing credit 
                agency shall specify the applicable percentage 
                and the maximum qualified basis which may be 
                taken into account under this section with 
                respect to such building. The applicable 
                percentage and maximum qualified basis so 
                specified shall not exceed the applicable 
                percentage and qualified basis determined under 
                this section without regard to this subsection.
          (8) Other definitions.--For purposes of this 
        subsection--
                  (A) Housing credit agency.--The term 
                ``housing credit agency'' means any agency 
                authorized to carry out this subsection.
                  (B) Possessions treated as States.--The term 
                ``State'' includes a possession of the United 
                States.
  (i) Definitions and special rules.--For purposes of this 
section--
          (1) Compliance period.--The term ``compliance 
        period'' means, with respect to any building, the 
        period of 15 taxable years beginning with the 1st 
        taxable year of the credit period with respect thereto.
          (2) Determination of whether building is federally 
        subsidized.--
                  (A) In general.--Except as otherwise provided 
                in this paragraph, for purposes of subsection 
                (b)(1), a new building shall be treated as 
                federally subsidized for any taxable year if, 
                at any time during such taxable year or any 
                prior taxable year, there is or was outstanding 
                any obligation the interest on which is exempt 
                from tax under section 103 the proceeds of 
                which are or were used (directly or indirectly) 
                with respect to such building or the operation 
                thereof.
                  (B) Election to reduce eligible basis by 
                proceeds of obligations.--A tax-exempt 
                obligation shall not be taken into account 
                under subparagraph (A) if the taxpayer elects 
                to exclude from the eligible basis of the 
                building for purposes of subsection (d) the 
                proceeds of such obligation.
                  (C) Special rule for subsidized construction 
                financing.--Subparagraph (A) shall not apply to 
                any tax-exempt obligation used to provide 
                construction financing for any building if--
                          (i) such obligation (when issued) 
                        identified the building for which the 
                        proceeds of such obligation would be 
                        used, and
                          (ii) such obligation is redeemed 
                        before such building is placed in 
                        service.
          (3) Low-income unit.--
                  (A) In general.--The term ``low-income unit'' 
                means any unit in a building if--
                          (i) such unit is rent-restricted (as 
                        defined in subsection (g)(2)), and
                          (ii) the individuals occupying such 
                        unit meet the income limitation 
                        applicable under subsection (g)(1) to 
                        the project of which such building is a 
                        part.
                  (B) Exceptions.--
                          (i) In general.--A unit shall not be 
                        treated as a low-income unit unless the 
                        unit is suitable for occupancy and used 
                        other than on a transient basis.
                          (ii) Suitability for occupancy.--For 
                        purposes of clause (i), the suitability 
                        of a unit for occupancy shall be 
                        determined under regulations prescribed 
                        by the Secretary taking into account 
                        local health, safety, and building 
                        codes.
                          (iii) Transitional housing for 
                        homeless.--For purposes of clause (i), 
                        a unit shall be considered to be used 
                        other than on a transient basis if the 
                        unit contains sleeping accommodations 
                        and kitchen and bathroom facilities and 
                        is located in a building--
                                  (I) which is used exclusively 
                                to facilitate the transition of 
                                homeless individuals (within 
                                the meaning of section 103 of 
                                the McKinney-Vento Homeless 
                                Assistance Act (42 U.S.C. 
                                11302), as in effect on the 
                                date of the enactment of this 
                                clause) to independent living 
                                within 24 months, and
                                  (II) in which a governmental 
                                entity or qualified nonprofit 
                                organization (as defined in 
                                subsection (h)(5)) provides 
                                such individuals with temporary 
                                housing and supportive services 
                                designed to assist such 
                                individuals in locating and 
                                retaining permanent housing.
                          (iv) Single-room occupancy units.--
                        For purposes of clause (i), a single-
                        room occupancy unit shall not be 
                        treated as used on a transient basis 
                        merely because it is rented on a month-
                        by-month basis.
                  (C) Special rule for buildings having 4 or 
                fewer units.--In the case of any building which 
                has 4 or fewer residential rental units, no 
                unit in such building shall be treated as a 
                low-income unit if the units in such building 
                are owned by--
                          (i) any individual who occupies a 
                        residential unit in such building, or
                          (ii) any person who is related (as 
                        defined in subsection (d)(2)(D)(iii)) 
                        to such individual.
                  (D) Certain students not to disqualify 
                unit.--A unit shall not fail to be treated as a 
                low-income unit merely because it is occupied--
                          (i) by an individual who is--
                                  (I) a student and receiving 
                                assistance under title IV of 
                                the Social Security Act,
                                  (II) a student who was 
                                previously under the care and 
                                placement responsibility of the 
                                State agency responsible for 
                                administering a plan under part 
                                B or part E of title IV of the 
                                Social Security Act, or
                                  (III) enrolled in a job 
                                training program receiving 
                                assistance under the Job 
                                Training Partnership Act or 
                                under other similar Federal, 
                                State, or local laws, or
                          (ii) entirely by full-time students 
                        if such students are--
                                  (I) single parents and their 
                                children and such parents are 
                                not dependents (as defined in 
                                section 152, determined without 
                                regard to subsections (b)(1), 
                                (b)(2), and (d)(1)(B) thereof) 
                                of another individual and such 
                                children are not dependents (as 
                                so defined) of another 
                                individual other than a parent 
                                of such children, or
                                  (II) married and file a joint 
                                return.
                  (E) Owner-occupied buildings having 4 or 
                fewer units eligible for credit where 
                development plan.--
                          (i) In general.--Subparagraph (C) 
                        shall not apply to the acquisition or 
                        rehabilitation of a building pursuant 
                        to a development plan of action 
                        sponsored by a State or local 
                        government or a qualified nonprofit 
                        organization (as defined in subsection 
                        (h)(5)(C)).
                          (ii) Limitation on credit.--In the 
                        case of a building to which clause (i) 
                        applies, the applicable fraction shall 
                        not exceed 80 percent of the unit 
                        fraction.
                          (iii) Certain unrented units treated 
                        as owner-occupied.--In the case of a 
                        building to which clause (i) applies, 
                        any unit which is not rented for 90 
                        days or more shall be treated as 
                        occupied by the owner of the building 
                        as of the 1st day it is not rented.
          (4) New building.--The term ``new building'' means a 
        building the original use of which begins with the 
        taxpayer.
          (5) Existing building.--The term ``existing 
        building'' means any building which is not a new 
        building.
          (6) Application to estates and trusts.--In the case 
        of an estate or trust, the amount of the credit 
        determined under subsection (a) and any increase in tax 
        under subsection (j) shall be apportioned between the 
        estate or trust and the beneficiaries on the basis of 
        the income of the estate or trust allocable to each.
          (7) Impact of tenant's right of 1st refusal to 
        acquire property.--
                  (A) In general.--No Federal income tax 
                benefit shall fail to be allowable to the 
                taxpayer with respect to any qualified low-
                income building merely by reason of a right of 
                1st refusal held by the tenants (in cooperative 
                form or otherwise) or resident management 
                corporation of such building or by a qualified 
                nonprofit organization (as defined in 
                subsection (h)(5)(C)) or government agency to 
                purchase the property after the close of the 
                compliance period for a price which is not less 
                than the minimum purchase price determined 
                under subparagraph (B).
                  (B) Minimum purchase price.--For purposes of 
                subparagraph (A), the minimum purchase price 
                under this subparagraph is an amount equal to 
                the sum of--
                          (i) the principal amount of 
                        outstanding indebtedness secured by the 
                        building (other than indebtedness 
                        incurred within the 5-year period 
                        ending on the date of the sale to the 
                        tenants), and
                          (ii) all Federal, State, and local 
                        taxes attributable to such sale.
                Except in the case of Federal income taxes, 
                there shall not be taken into account under 
                clause (ii) any additional tax attributable to 
                the application of clause (ii).
          (8) Treatment of rural projects.--For purposes of 
        this section, in the case of any project for 
        residential rental property located in a rural area (as 
        defined in section 520 of the Housing Act of 1949), any 
        income limitation measured by reference to area median 
        gross income shall be measured by reference to the 
        greater of area median gross income or national non-
        metropolitan median income. The preceding sentence 
        shall not apply with respect to any building if 
        paragraph (1) of section 42(h) does not apply by reason 
        of paragraph (4) thereof to any portion of the credit 
        determined under this section with respect to such 
        building.
          (9) Coordination with low-income housing grants.--
                  (A) Reduction in State housing credit ceiling 
                for low-income housing grants received in 
                2009.--For purposes of this section, the 
                amounts described in clauses (i) through (iv) 
                of subsection (h)(3)(C) with respect to any 
                State for 2009 shall each be reduced by so much 
                of such amount as is taken into account in 
                determining the amount of any grant to such 
                State under section 1602 of the American 
                Recovery and Reinvestment Tax Act of 2009.
                  (B) Special rule for basis.--Basis of a 
                qualified low-income building shall not be 
                reduced by the amount of any grant described in 
                subparagraph (A).
  (j) Recapture of credit.--
          (1) In general.--If--
                  (A) as of the close of any taxable year in 
                the compliance period, the amount of the 
                qualified basis of any building with respect to 
                the taxpayer is less than
                  (B) the amount of such basis as of the close 
                of the preceding taxable year,
        then the taxpayer's tax under this chapter for the 
        taxable year shall be increased by the credit recapture 
        amount.
          (2) Credit recapture amount.--For purposes of 
        paragraph (1), the credit recapture amount is an amount 
        equal to the sum of--
                  (A) the aggregate decrease in the credits 
                allowed to the taxpayer under section 38 for 
                all prior taxable years which would have 
                resulted if the accelerated portion of the 
                credit allowable by reason of this section were 
                not allowed for all prior taxable years with 
                respect to the excess of the amount described 
                in paragraph (1)(B) over the amount described 
                in paragraph (1)(A), plus
                  (B) interest at the overpayment rate 
                established under section 6621 on the amount 
                determined under subparagraph (A) for each 
                prior taxable year for the period beginning on 
                the due date for filing the return for the 
                prior taxable year involved.
        No deduction shall be allowed under this chapter for 
        interest described in subparagraph (B).
          (3) Accelerated portion of credit.--For purposes of 
        paragraph (2), the accelerated portion of the credit 
        for the prior taxable years with respect to any amount 
        of basis is the excess of--
                  (A) the aggregate credit allowed by reason of 
                this section (without regard to this 
                subsection) for such years with respect to such 
                basis, over
                  (B) the aggregate credit which would be 
                allowable by reason of this section for such 
                years with respect to such basis if the 
                aggregate credit which would (but for this 
                subsection) have been allowable for the entire 
                compliance period were allowable ratably over 
                15 years.
          (4) Special rules.--
                  (A) Tax benefit rule.--The tax for the 
                taxable year shall be increased under paragraph 
                (1) only with respect to credits allowed by 
                reason of this section which were used to 
                reduce tax liability. In the case of credits 
                not so used to reduce tax liability, the 
                carryforwards and carrybacks under section 39 
                shall be appropriately adjusted.
                  (B) Only basis for which credit allowed taken 
                into account.--Qualified basis shall be taken 
                into account under paragraph (1)(B) only to the 
                extent such basis was taken into account in 
                determining the credit under subsection (a) for 
                the preceding taxable year referred to in such 
                paragraph.
                  (C) No recapture of additional credit 
                allowable by reason of subsection (f)(3).--
                Paragraph (1) shall apply to a decrease in 
                qualified basis only to the extent such 
                decrease exceeds the amount of qualified basis 
                with respect to which a credit was allowable 
                for the taxable year referred to in paragraph 
                (1)(B) by reason of subsection (f)(3).
                  (D) No credits against tax.--Any increase in 
                tax under this subsection shall not be treated 
                as a tax imposed by this chapter for purposes 
                of determining the amount of any credit under 
                this chapter.
                  (E) No recapture by reason of casualty 
                loss.--The increase in tax under this 
                subsection shall not apply to a reduction in 
                qualified basis by reason of a casualty loss to 
                the extent such loss is restored by 
                reconstruction or replacement within a 
                reasonable period established by the Secretary.
                  (F) No recapture where de minimis changes in 
                floor space.--The Secretary may provide that 
                the increase in tax under this subsection shall 
                not apply with respect to any building if--
                          (i) such increase results from a de 
                        minimis change in the floor space 
                        fraction under subsection (c)(1), and
                          (ii) the building is a qualified low-
                        income building after such change.
          (5) Certain partnerships treated as the taxpayer.--
                  (A) In general.--For purposes of applying 
                this subsection to a partnership to which this 
                paragraph applies--
                          (i) such partnership shall be treated 
                        as the taxpayer to which the credit 
                        allowable under subsection (a) was 
                        allowed,
                          (ii) the amount of such credit 
                        allowed shall be treated as the amount 
                        which would have been allowed to the 
                        partnership were such credit allowable 
                        to such partnership,
                          (iii) paragraph (4)(A) shall not 
                        apply, and
                          (iv) the amount of the increase in 
                        tax under this subsection for any 
                        taxable year shall be allocated among 
                        the partners of such partnership in the 
                        same manner as such partnership's 
                        taxable income for such year is 
                        allocated among such partners.
                  (B) Partnerships to which paragraph 
                applies.--This paragraph shall apply to any 
                partnership which has 35 or more partners 
                unless the partnership elects not to have this 
                paragraph apply.
                  (C) Special rules.--
                          [(i) Husband and wife treated as 1 
                        partner.--For purposes of subparagraph 
                        (B)(i), a husband and wife (and their 
                        estates) shall be treated as 1 
                        partner.]
                          (i) Married couple treated as 1 
                        partner.--For purposes of subparagraph 
                        (B), individuals married to one another 
                        (and their estates) shall be treated as 
                        1 partner.
                          (ii) Election irrevocable.--Any 
                        election under subparagraph (B), once 
                        made, shall be irrevocable.
          (6) No recapture on disposition of building which 
        continues in qualified use.--
                  (A) In general.--The increase in tax under 
                this subsection shall not apply solely by 
                reason of the disposition of a building (or an 
                interest therein) if it is reasonably expected 
                that such building will continue to be operated 
                as a qualified low-income building for the 
                remaining compliance period with respect to 
                such building.
                  (B) Statute of limitations.--If a building 
                (or an interest therein) is disposed of during 
                any taxable year and there is any reduction in 
                the qualified basis of such building which 
                results in an increase in tax under this 
                subsection for such taxable or any subsequent 
                taxable year, then--
                          (i) the statutory period for the 
                        assessment of any deficiency with 
                        respect to such increase in tax shall 
                        not expire before the expiration of 3 
                        years from the date the Secretary is 
                        notified by the taxpayer (in such 
                        manner as the Secretary may prescribe) 
                        of such reduction in qualified basis, 
                        and
                          (ii) such deficiency may be assessed 
                        before the expiration of such 3-year 
                        period notwithstanding the provisions 
                        of any other law or rule of law which 
                        would otherwise prevent such 
                        assessment.
  (k) Application of at-risk rules.--For purposes of this 
section--
          (1) In general.--Except as otherwise provided in this 
        subsection, rules similar to the rules of section 
        49(a)(1) (other than subparagraphs (D)(ii)(II) and 
        (D)(iv)(I) thereof), section 49(a)(2), and section 
        49(b)(1) shall apply in determining the qualified basis 
        of any building in the same manner as such sections 
        apply in determining the credit base of property.
          (2) Special rules for determining qualified person.--
        For purposes of paragraph (1)--
                  (A) In general.--If the requirements of 
                subparagraphs (B), (C), and (D) are met with 
                respect to any financing borrowed from a 
                qualified nonprofit organization (as defined in 
                subsection (h)(5)), the determination of 
                whether such financing is qualified commercial 
                financing with respect to any qualified low-
                income building shall be made without regard to 
                whether such organization--
                          (i) is actively and regularly engaged 
                        in the business of lending money, or
                          (ii) is a person described in section 
                        49(a)(1)(D)(iv)(II).
                  (B) Financing secured by property.--The 
                requirements of this subparagraph are met with 
                respect to any financing if such financing is 
                secured by the qualified low-income building, 
                except that this subparagraph shall not apply 
                in the case of a federally assisted building 
                described in subsection (d)(6)(C) if--
                          (i) a security interest in such 
                        building is not permitted by a Federal 
                        agency holding or insuring the mortgage 
                        secured by such building, and
                          (ii) the proceeds from the financing 
                        (if any) are applied to acquire or 
                        improve such building.
                  (C) Portion of building attributable to 
                financing.--The requirements of this 
                subparagraph are met with respect to any 
                financing for any taxable year in the 
                compliance period if, as of the close of such 
                taxable year, not more than 60 percent of the 
                eligible basis of the qualified low-income 
                building is attributable to such financing 
                (reduced by the principal and interest of any 
                governmental financing which is part of a wrap-
                around mortgage involving such financing).
                  (D) Repayment of principal and interest.--The 
                requirements of this subparagraph are met with 
                respect to any financing if such financing is 
                fully repaid on or before the earliest of--
                          (i) the date on which such financing 
                        matures,
                          (ii) the 90th day after the close of 
                        the compliance period with respect to 
                        the qualified low-income building, or
                          (iii) the date of its refinancing or 
                        the sale of the building to which such 
                        financing relates.
                In the case of a qualified nonprofit 
                organization which is not described in section 
                49(a)(1)(D)(iv)(II) with respect to a building, 
                clause (ii) of this subparagraph shall be 
                applied as if the date described therein were 
                the 90th day after the earlier of the date the 
                building ceases to be a qualified low-income 
                building or the date which is 15 years after 
                the close of a compliance period with respect 
                thereto.
          (3) Present value of financing.--If the rate of 
        interest on any financing described in paragraph (2)(A) 
        is less than the rate which is 1 percentage point below 
        the applicable Federal rate as of the time such 
        financing is incurred, then the qualified basis (to 
        which such financing relates) of the qualified low-
        income building shall be the present value of the 
        amount of such financing, using as the discount rate 
        such applicable Federal rate. For purposes of the 
        preceding sentence, the rate of interest on any 
        financing shall be determined by treating interest to 
        the extent of government subsidies as not payable.
          (4) Failure to fully repay.--
                  (A) In general.--To the extent that the 
                requirements of paragraph (2)(D) are not met, 
                then the taxpayer's tax under this chapter for 
                the taxable year in which such failure occurs 
                shall be increased by an amount equal to the 
                applicable portion of the credit under this 
                section with respect to such building, 
                increased by an amount of interest for the 
                period--
                          (i) beginning with the due date for 
                        the filing of the return of tax imposed 
                        by chapter 1 for the 1st taxable year 
                        for which such credit was allowable, 
                        and
                          (ii) ending with the due date for the 
                        taxable year in which such failure 
                        occurs,
                determined by using the underpayment rate and 
                method under section 6621.
                  (B) Applicable portion.--For purposes of 
                subparagraph (A), the term ``applicable 
                portion'' means the aggregate decrease in the 
                credits allowed to a taxpayer under section 38 
                for all prior taxable years which would have 
                resulted if the eligible basis of the building 
                were reduced by the amount of financing which 
                does not meet requirements of paragraph (2)(D).
                  (C) Certain rules to apply.--Rules similar to 
                the rules of subparagraphs (A) and (D) of 
                subsection (j)(4) shall apply for purposes of 
                this subsection.
  (l) Certifications and other reports to Secretary.--
          (1) Certification with respect to 1st year of credit 
        period.--Following the close of the 1st taxable year in 
        the credit period with respect to any qualified low-
        income building, the taxpayer shall certify to the 
        Secretary (at such time and in such form and in such 
        manner as the Secretary prescribes)--
                  (A) the taxable year, and calendar year, in 
                which such building was placed in service,
                  (B) the adjusted basis and eligible basis of 
                such building as of the close of the 1st year 
                of the credit period,
                  (C) the maximum applicable percentage and 
                qualified basis permitted to be taken into 
                account by the appropriate housing credit 
                agency under subsection (h),
                  (D) the election made under subsection (g) 
                with respect to the qualified low-income 
                housing project of which such building is a 
                part, and
                  (E) such other information as the Secretary 
                may require.
        In the case of a failure to make the certification 
        required by the preceding sentence on the date 
        prescribed therefor, unless it is shown that such 
        failure is due to reasonable cause and not to willful 
        neglect, no credit shall be allowable by reason of 
        subsection (a) with respect to such building for any 
        taxable year ending before such certification is made.
          (2) Annual reports to the Secretary.--The Secretary 
        may require taxpayers to submit an information return 
        (at such time and in such form and manner as the 
        Secretary prescribes) for each taxable year setting 
        forth--
                  (A) the qualified basis for the taxable year 
                of each qualified low-income building of the 
                taxpayer,
                  (B) the information described in paragraph 
                (1)(C) for the taxable year, and
                  (C) such other information as the Secretary 
                may require.
        The penalty under section 6652(j) shall apply to any 
        failure to submit the return required by the Secretary 
        under the preceding sentence on the date prescribed 
        therefor.
          (3) Annual reports from housing credit agencies.--
        Each agency which allocates any housing credit amount 
        to any building for any calendar year shall submit to 
        the Secretary (at such time and in such manner as the 
        Secretary shall prescribe) an annual report 
        specifying--
                  (A) the amount of housing credit amount 
                allocated to each building for such year,
                  (B) sufficient information to identify each 
                such building and the taxpayer with respect 
                thereto, and
                  (C) such other information as the Secretary 
                may require.
        The penalty under section 6652(j) shall apply to any 
        failure to submit the report required by the preceding 
        sentence on the date prescribed therefor.
  (m) Responsibilities of housing credit agencies.--
          (1) Plans for allocation of credit among projects.--
                  (A) In general.--Notwithstanding any other 
                provision of this section, the housing credit 
                dollar amount with respect to any building 
                shall be zero unless--
                          (i) such amount was allocated 
                        pursuant to a qualified allocation plan 
                        of the housing credit agency which is 
                        approved by the governmental unit (in 
                        accordance with rules similar to the 
                        rules of section 147(f)(2) (other than 
                        subparagraph (B)(ii) thereof)) of which 
                        such agency is a part,
                          (ii) such agency notifies the chief 
                        executive officer (or the equivalent) 
                        of the local jurisdiction within which 
                        the building is located of such project 
                        and provides such individual a 
                        reasonable opportunity to comment on 
                        the project,
                          (iii) a comprehensive market study of 
                        the housing needs of low-income 
                        individuals in the area to be served by 
                        the project is conducted before the 
                        credit allocation is made and at the 
                        developer's expense by a disinterested 
                        party who is approved by such agency, 
                        and
                          (iv) a written explanation is 
                        available to the general public for any 
                        allocation of a housing credit dollar 
                        amount which is not made in accordance 
                        with established priorities and 
                        selection criteria of the housing 
                        credit agency.
                  (B) Qualified allocation plan.--For purposes 
                of this paragraph, the term ``qualified 
                allocation plan'' means any plan--
                          (i) which sets forth selection 
                        criteria to be used to determine 
                        housing priorities of the housing 
                        credit agency which are appropriate to 
                        local conditions,
                          (ii) which also gives preference in 
                        allocating housing credit dollar 
                        amounts among selected projects to--
                                  (I) projects serving the 
                                lowest income tenants,
                                  (II) projects obligated to 
                                serve qualified tenants for the 
                                longest periods, and
                                  (III) projects which are 
                                located in qualified census 
                                tracts (as defined in 
                                subsection (d)(5)(B)(ii)) and 
                                the development of which 
                                contributes to a concerted 
                                community revitalization plan, 
                                and
                          (iii) which provides a procedure that 
                        the agency (or an agent or other 
                        private contractor of such agency) will 
                        follow in monitoring for noncompliance 
                        with the provisions of this section and 
                        in notifying the Internal Revenue 
                        Service of such noncompliance which 
                        such agency becomes aware of and in 
                        monitoring for noncompliance with 
                        habitability standards through regular 
                        site visits.
                  (C) Certain selection criteria must be 
                used.--The selection criteria set forth in a 
                qualified allocation plan must include
                          (i) project location,
                          (ii) housing needs characteristics,
                          (iii) project characteristics, 
                        including whether the project includes 
                        the use of existing housing as part of 
                        a community revitalization plan,
                          (iv) sponsor characteristics,
                          (v) tenant populations with special 
                        housing needs,
                          (vi) public housing waiting lists,
                          (vii) tenant populations of 
                        individuals with children,
                          (viii) projects intended for eventual 
                        tenant ownership,
                          (ix) the energy efficiency of the 
                        project, and
                          (x) the historic nature of the 
                        project.
                  (D) Application to bond financed projects.--
                Subsection (h)(4) shall not apply to any 
                project unless the project satisfies the 
                requirements for allocation of a housing credit 
                dollar amount under the qualified allocation 
                plan applicable to the area in which the 
                project is located.
          (2) Credit allocated to building not to exceed amount 
        necessary to assure project feasibility.--
                  (A) In general.--The housing credit dollar 
                amount allocated to a project shall not exceed 
                the amount the housing credit agency determines 
                is necessary for the financial feasibility of 
                the project and its viability as a qualified 
                low-income housing project throughout the 
                credit period.
                  (B) Agency evaluation.--In making the 
                determination under subparagraph (A), the 
                housing credit agency shall consider--
                          (i) the sources and uses of funds and 
                        the total financing planned for the 
                        project,
                          (ii) any proceeds or receipts 
                        expected to be generated by reason of 
                        tax benefits,
                          (iii) the percentage of the housing 
                        credit dollar amount used for project 
                        costs other than the cost of 
                        intermediaries, and
                          (iv) the reasonableness of the 
                        developmental and operational costs of 
                        the project.
                Clause (iii) shall not be applied so as to 
                impede the development of projects in hard-to-
                develop areas. Such a determination shall not 
                be construed to be a representation or warranty 
                as to the feasibility or viability of the 
                project.
                  (C) Determination made when credit amount 
                applied for and when building placed in 
                service.--
                          (i) In general.--A determination 
                        under subparagraph (A) shall be made as 
                        of each of the following times:
                                  (I) The application for the 
                                housing credit dollar amount.
                                  (II) The allocation of the 
                                housing credit dollar amount.
                                  (III) The date the building 
                                is placed in service.
                          (ii) Certification as to amount of 
                        other subsidies.--Prior to each 
                        determination under clause (i), the 
                        taxpayer shall certify to the housing 
                        credit agency the full extent of all 
                        Federal, State, and local subsidies 
                        which apply (or which the taxpayer 
                        expects to apply) with respect to the 
                        building.
                  (D) Application to bond financed projects.--
                Subsection (h)(4) shall not apply to any 
                project unless the governmental unit which 
                issued the bonds (or on behalf of which the 
                bonds were issued) makes a determination under 
                rules similar to the rules of subparagraphs (A) 
                and (B).
  (n) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary or appropriate to carry out the 
purposes of this section, including regulations--
          (1) dealing with--
                  (A) projects which include more than 1 
                building or only a portion of a building,
                  (B) buildings which are placed in service in 
                portions,
          (2) providing for the application of this section to 
        short taxable years,
          (3) preventing the avoidance of the rules of this 
        section, and
          (4) providing the opportunity for housing credit 
        agencies to correct administrative errors and omissions 
        with respect to allocations and record keeping within a 
        reasonable period after their discovery, taking into 
        account the availability of regulations and other 
        administrative guidance from the Secretary.

Subchapter B--COMPUTATION OF TAXABLE INCOME

           *       *       *       *       *       *       *


  PART I--DEFINITION OF GROSS INCOME, ADJUSTED GROSS INCOME, TAXABLE 
INCOME, ETC.

           *       *       *       *       *       *       *


SEC. 62. ADJUSTED GROSS INCOME DEFINED.

  (a) General rule.--For purposes of this subtitle, the term 
``adjusted gross income'' means, in the case of an individual, 
gross income minus the following deductions:
          (1) Trade and business deductions.--The deductions 
        allowed by this chapter (other than by part VII of this 
        subchapter) which are attributable to a trade or 
        business carried on by the taxpayer, if such trade or 
        business does not consist of the performance of 
        services by the taxpayer as an employee.
          (2) Certain trade and business deductions of 
        employees.--
                  (A) Reimbursed expenses of employees.--The 
                deductions allowed by part VI (section 161 and 
                following) which consist of expenses paid or 
                incurred by the taxpayer, in connection with 
                the performance by him of services as an 
                employee, under a reimbursement or other 
                expense allowance arrangement with his 
                employer. The fact that the reimbursement may 
                be provided by a third party shall not be 
                determinative of whether or not the preceding 
                sentence applies.
                  (B) Certain expenses of performing artists.--
                The deductions allowed by section 162 which 
                consist of expenses paid or incurred by a 
                qualified performing artist in connection with 
                the performances by him of services in the 
                performing arts as an employee.
                  (C) Certain expenses of officials.--The 
                deductions allowed by section 162 which consist 
                of expenses paid or incurred with respect to 
                services performed by an official as an 
                employee of a State or a political subdivision 
                thereof in a position compensated in whole or 
                in part on a fee basis.
                  (D) Certain expenses of elementary and 
                secondary school teachers.--The deductions 
                allowed by section 162 which consist of 
                expenses, not in excess of $250, paid or 
                incurred by an eligible educator--
                          (i) by reason of the participation of 
                        the educator in professional 
                        development courses related to the 
                        curriculum in which the educator 
                        provides instruction or to the students 
                        for which the educator provides 
                        instruction, and
                          (ii) in connection with books, 
                        supplies (other than nonathletic 
                        supplies for courses of instruction in 
                        health or physical education), computer 
                        equipment (including related software 
                        and services) and other equipment, and 
                        supplementary materials used by the 
                        eligible educator in the classroom.
                  (E) Certain expenses of members of reserve 
                components of the Armed Forces of the United 
                States.--The deductions allowed by section 162 
                which consist of expenses, determined at a rate 
                not in excess of the rates for travel expenses 
                (including per diem in lieu of subsistence) 
                authorized for employees of agencies under 
                subchapter I of chapter 57 of title 5, United 
                States Code, paid or incurred by the taxpayer 
                in connection with the performance of services 
                by such taxpayer as a member of a reserve 
                component of the Armed Forces of the United 
                States for any period during which such 
                individual is more than 100 miles away from 
                home in connection with such services.
          (3) Losses from sale or exchange of property.--The 
        deductions allowed by part VI (sec. 161 and following) 
        as losses from the sale or exchange of property.
          (4) Deductions attributable to rents and royalties.--
        The deductions allowed by part VI (sec. 161 and 
        following), by section 212 (relating to expenses for 
        production of income), and by section 611 (relating to 
        depletion) which are attributable to property held for 
        the production of rents or royalties.
          (5) Certain deductions of life tenants and income 
        beneficiaries of property.--In the case of a life 
        tenant of property, or an income beneficiary of 
        property held in trust, or an heir, legatee, or devisee 
        of an estate, the deduction for depreciation allowed by 
        section 167 and the deduction allowed by section 611.
          (6) Pension, profit-sharing, and annuity plans of 
        self-employed individuals.--In the case of an 
        individual who is an employee within the meaning of 
        section 401(c)(1), the deduction allowed by section 
        404.
          (7) Retirement savings.--The deduction allowed by 
        section 219 (relating to deduction of certain 
        retirement savings).
          (9) Penalties forfeited because of premature 
        withdrawal of funds from time savings accounts or 
        deposits.--The deductions allowed by section 165 for 
        losses incurred in any transaction entered into for 
        profit, though not connected with a trade or business, 
        to the extent that such losses include amounts 
        forfeited to a bank, mutual savings bank, savings and 
        loan association, building and loan association, 
        cooperative bank or homestead association as a penalty 
        for premature withdrawal of funds from a time savings 
        account, certificate of deposit, or similar class of 
        deposit.
          (11) Reforestation expenses.--The deduction allowed 
        by section 194.
          (12) Certain required repayments of supplemental 
        unemployment compensation benefits.--The deduction 
        allowed by section 165 for the repayment to a trust 
        described in paragraph (9) or (17) of section 501(c) of 
        supplemental unemployment compensation benefits 
        received from such trust if such repayment is required 
        because of the receipt of trade readjustment allowances 
        under section 231 or 232 of the Trade Act of 1974 (19 
        U.S.C. 2291 and 2292).
          (13) Jury duty pay remitted to employer.--Any 
        deduction allowable under this chapter by reason of an 
        individual remitting any portion of any jury pay to 
        such individual's employer in exchange for payment by 
        the employer of compensation for the period such 
        individual was performing jury duty. For purposes of 
        the preceding sentence, the term ``jury pay'' means any 
        payment received by the individual for the discharge of 
        jury duty.
          (15) Moving expenses.--The deduction allowed by 
        section 217.
          (16) Archer MSAs.--The deduction allowed by section 
        220.
          (17) Interest on education loans.--The deduction 
        allowed by section 221.
          (18) Higher education expenses.--The deduction 
        allowed by section 222.
          (19) Health savings accounts.--The deduction allowed 
        by section 223.
          (20) Costs involving discrimination suits, etc..--Any 
        deduction allowable under this chapter for attorney 
        fees and court costs paid by, or on behalf of, the 
        taxpayer in connection with any action involving a 
        claim of unlawful discrimination (as defined in 
        subsection (e)) or a claim of a violation of subchapter 
        III of chapter 37 of title 31, United States Code, or a 
        claim made under section 1862(b)(3)(A) of the Social 
        Security Act (42 U.S.C. 1395y(b)(3)(A)). The preceding 
        sentence shall not apply to any deduction in excess of 
        the amount includible in the taxpayer's gross income 
        for the taxable year on account of a judgment or 
        settlement (whether by suit or agreement and whether as 
        lump sum or periodic payments) resulting from such 
        claim.
          (21) Attorneys' fees relating to awards to 
        whistleblowers.--
                  (A) In general.--Any deduction allowable 
                under this chapter for attorney fees and court 
                costs paid by, or on behalf of, the taxpayer in 
                connection with any award under--
                          (i) section 7623(b), or
                          (ii) in the case of taxable years 
                        beginning after December 31, 2017, any 
                        action brought under--
                                  (I) section 21F of the 
                                Securities Exchange Act of 1934 
                                (15 U.S.C. 78u-6),
                                  (II) a State false claims 
                                act, including a State false 
                                claims act with qui tam 
                                provisions, or
                                  (III) section 23 of the 
                                Commodity Exchange Act (7 
                                U.S.C. 26).
                  (B) May not exceed award.--Subparagraph (A) 
                shall not apply to any deduction in excess of 
                the amount includible in the taxpayer's gross 
                income for the taxable year on account of such 
                award.
Nothing in this section shall permit the same item to be 
deducted more than once. Any deduction allowed by section 199A 
shall not be treated as a deduction described in any of the 
preceding paragraphs of this subsection.
  (b) Qualified performing artist.--
          (1) In general.--For purposes of subsection 
        (a)(2)(B), the term ``qualified performing artist'' 
        means, with respect to any taxable year, any individual 
        if--
                  (A) such individual performed services in the 
                performing arts as an employee during the 
                taxable year for at least 2 employers,
                  (B) the aggregate amount allowable as a 
                deduction under section 162 in connection with 
                the performance of such services exceeds 10 
                percent of such individual's gross income 
                attributable to the performance of such 
                services, and
                  (C) the adjusted gross income of such 
                individual for the taxable year (determined 
                without regard to subsection (a)(2)(B)) does 
                not exceed $16,000.
          (2) Nominal employer not taken into account.--An 
        individual shall not be treated as performing services 
        in the performing arts as an employee for any employer 
        during any taxable year unless the amount received by 
        such individual from such employer for the performance 
        of such services during the taxable year equals or 
        exceeds $200.
          (3) Special rules for married couples.--
                  (A) In general.--Except in the case of a 
                [husband and wife who lived apart] married 
                couple who lived apart at all times during the 
                taxable year, if the taxpayer is married at the 
                close of the taxable year, subsection (a)(2)(B) 
                shall apply only if [the taxpayer and his 
                spouse] the taxpayer and the spouse of the 
                taxpayer file a joint return for the taxable 
                year.
                  (B) Application of paragraph (1).--In the 
                case of a joint return--
                          (i) paragraph (1) (other than 
                        subparagraph (C) thereof) shall be 
                        applied separately with respect to each 
                        spouse, but
                          (ii) paragraph (1)(C) shall be 
                        applied with respect to their combined 
                        adjusted gross income.
                  (C) Determination of marital status.--For 
                purposes of this subsection, marital status 
                shall be determined under section 7703(a).
                  (D) Joint return.--For purposes of this 
                subsection, the term ``joint return'' means the 
                joint return of a [husband and wife] married 
                couple made under section 6013.
  (c) Certain arrangements not treated as reimbursement 
arrangements.--For purposes of subsection (a)(2)(A), an 
arrangement shall in no event be treated as a reimbursement or 
other expense allowance arrangement if--
          (1) such arrangement does not require the employee to 
        substantiate the expenses covered by the arrangement to 
        the person providing the reimbursement, or
          (2) such arrangement provides the employee the right 
        to retain any amount in excess of the substantiated 
        expenses covered under the arrangement.
The substantiation requirements of the preceding sentence shall 
not apply to any expense to the extent that substantiation is 
not required under section 274(d) for such expense by reason of 
the regulations prescribed under the 2nd sentence thereof.
  (d) Definition; special rules.--
          (1) Eligible educator.--
                  (A) In general.--For purposes of subsection 
                (a)(2)(D), the term ``eligible educator'' 
                means, with respect to any taxable year, an 
                individual who is a kindergarten through grade 
                12 teacher, instructor, counselor, principal, 
                or aide in a school for at least 900 hours 
                during a school year.
                  (B) School.--The term ``school'' means any 
                school which provides elementary education or 
                secondary education (kindergarten through grade 
                12), as determined under State law.
          (2) Coordination with exclusions.--A deduction shall 
        be allowed under subsection (a)(2)(D) for expenses only 
        to the extent the amount of such expenses exceeds the 
        amount excludable under section 135, 529(c)(1), or 
        530(d)(2) for the taxable year.
          (3) Inflation adjustment.--In the case of any taxable 
        year beginning after 2015, the $250 amount in 
        subsection (a)(2)(D) shall be increased by an amount 
        equal to--
                  (A) such dollar amount, multiplied by
                  (B) the cost-of-living adjustment determined 
                under section 1(f)(3) for the calendar year in 
                which the taxable year begins, determined by 
                substituting ``calendar year 2014'' for 
                ``calendar year 2016'' in subparagraph (A)(ii) 
                thereof.
        Any increase determined under the preceding sentence 
        shall be rounded to the nearest multiple of $50.
  (e) Unlawful discrimination defined.--For purposes of 
subsection (a)(20), the term ``unlawful discrimination'' means 
an act that is unlawful under any of the following:
          (1) Section 302 of the Civil Rights Act of 1991 (42 
        U.S.C. 2000e-16b).
          (2) Section 201, 202, 203, 204, 205, 206, or 207 of 
        the Congressional Accountability Act of 1995 (2 U.S.C. 
        1311, 1312, 1313, 1314, 1315, 1316, or 1317).
          (3) The National Labor Relations Act (29 U.S.C. 151 
        et seq.).
          (4) The Fair Labor Standards Act of 1938 (29 U.S.C. 
        201 et seq.).
          (5) Section 4 or 15 of the Age Discrimination in 
        Employment Act of 1967 (29 U.S.C. 623 or 633a).
          (6) Section 501 or 504 of the Rehabilitation Act of 
        1973 (29 U.S.C. 791 or 794).
          (7) Section 510 of the Employee Retirement Income 
        Security Act of 1974 (29 U.S.C. 1140).
          (8) Title IX of the Education Amendments of 1972 (20 
        U.S.C. 1681 et seq.).
          (9) The Employee Polygraph Protection Act of 1988 (29 
        U.S.C. 2001 et seq.).
          (10) The Worker Adjustment and Retraining 
        Notification Act (29 U.S.C. 2102 et seq.).
          (11) Section 105 of the Family and Medical Leave Act 
        of 1993 (29 U.S.C. 2615).
          (12) Chapter 43 of title 38, United States Code 
        (relating to employment and reemployment rights of 
        members of the uniformed services).
          (13) Section 1977, 1979, or 1980 of the Revised 
        Statutes (42 U.S.C. 1981, 1983, or 1985).
          (14) Section 703, 704, or 717 of the Civil Rights Act 
        of 1964 (42 U.S.C. 2000e-2, 2000e-3, or 2000e-16).
          (15) Section 804, 805, 806, 808, or 818 of the Fair 
        Housing Act (42 U.S.C. 3604, 3605, 3606, 3608, or 
        3617).
          (16) Section 102, 202, 302, or 503 of the Americans 
        with Disabilities Act of 1990 (42 U.S.C. 12112, 12132, 
        12182, or 12203).
          (17) Any provision of Federal law (popularly known as 
        whistleblower protection provisions) prohibiting the 
        discharge of an employee, the discrimination against an 
        employee, or any other form of retaliation or reprisal 
        against an employee for asserting rights or taking 
        other actions permitted under Federal law.
          (18) Any provision of Federal, State, or local law, 
        or common law claims permitted under Federal, State, or 
        local law--
                  
                  (i) providing for the enforcement of civil 
                rights, or
                  
                  (ii) regulating any aspect of the employment 
                relationship, including claims for wages, 
                compensation, or benefits, or prohibiting the 
                discharge of an employee, the discrimination 
                against an employee, or any other form of 
                retaliation or reprisal against an employee for 
                asserting rights or taking other actions 
                permitted by law.

SEC. 63. TAXABLE INCOME DEFINED.

  (a) In general.--Except as provided in subsection (b), for 
purposes of this subtitle, the term ``taxable income'' means 
gross income minus the deductions allowed by this chapter 
(other than the standard deduction).
  (b) Individuals who do not itemize their deductions.--In the 
case of an individual who does not elect to itemize his 
deductions for the taxable year, for purposes of this subtitle, 
the term ``taxable income'' means adjusted gross income, 
minus--
          (1) the standard deduction,
          (2) the deduction for personal exemptions provided in 
        section 151, and
          (3) any deduction provided in section 199A.
  (c) Standard deduction.--For purposes of this subtitle--
          (1) In general.--Except as otherwise provided in this 
        subsection, the term ``standard deduction'' means the 
        sum of--
                  (A) the basic standard deduction, and
                  (B) the additional standard deduction.
          (2) Basic standard deduction.--For purposes of 
        paragraph (1), the basic standard deduction is--
                  (A) 200 percent of the dollar amount in 
                effect under subparagraph (C) for the taxable 
                year in the case of--
                          (i) a joint return, or
                          (ii) a surviving spouse (as defined 
                        in section 2(a)),
                  (B) $4,400 in the case of a head of household 
                (as defined in section 2(b)), or
                  (C) $3,000 in any other case.
          (3) Additional standard deduction for aged and 
        blind.--For purposes of paragraph (1), the additional 
        standard deduction is the sum of each additional amount 
        to which the taxpayer is entitled under subsection (f).
          (4) Adjustments for inflation.--In the case of any 
        taxable year beginning in a calendar year after 1988, 
        each dollar amount contained in paragraph (2)(B), 
        (2)(C), or (5) or subsection (f) shall be increased by 
        an amount equal to--
                  (A) such dollar amount, multiplied by
                  (B) the cost-of-living adjustment determined 
                under section 1(f)(3) for the calendar year in 
                which the taxable year begins, by substituting 
                for ``calendar year 2016'' in subparagraph 
                (A)(ii) thereof--
                          (i) ``calendar year 1987'' in the 
                        case of the dollar amounts contained in 
                        paragraph (2)(B), (2)(C), or (5)(A) or 
                        subsection (f), and
                          (ii) ``calendar year 1997'' in the 
                        case of the dollar amount contained in 
                        paragraph (5)(B).
          (5) Limitation on basic standard deduction in the 
        case of certain dependents.--In the case of an 
        individual with respect to whom a deduction under 
        section 151 is allowable to another taxpayer for a 
        taxable year beginning in the calendar year in which 
        the individual's taxable year begins, the basic 
        standard deduction applicable to such individual for 
        such individual's taxable year shall not exceed the 
        greater of--
                  (A) $500, or
                  (B) the sum of $250 and such individual's 
                earned income.
          (6) Certain individuals, etc., not eligible for 
        standard deduction.--In the case of--
                  (A) a married individual filing a separate 
                return where either spouse itemizes deductions,
                  (B) a nonresident alien individual,
                  (C) an individual making a return under 
                section 443(a)(1) for a period of less than 12 
                months on account of a change in his annual 
                accounting period, or
                  (D) an estate or trust, common trust fund, or 
                partnership,
        the standard deduction shall be zero.
          (7) Special rules for taxable years 2018 through 
        2025.--In the case of a taxable year beginning after 
        December 31, 2017, and before January 1, 2026--
                  (A) Increase in standard deduction.--
                Paragraph (2) shall be applied--
                          (i) by substituting ``$18,000'' for 
                        ``$4,400'' in subparagraph (B), and
                          (ii) by substituting ``$12,000'' for 
                        ``$3,000'' in subparagraph (C).
                  (B) Adjustment for inflation.--
                          (i) In general.--Paragraph (4) shall 
                        not apply to the dollar amounts 
                        contained in paragraphs (2)(B) and 
                        (2)(C).
                          (ii) Adjustment of increased 
                        amounts.--In the case of a taxable year 
                        beginning after 2018, the $18,000 and 
                        $12,000 amounts in subparagraph (A) 
                        shall each be increased by an amount 
                        equal to--
                                  (I) such dollar amount, 
                                multiplied by
                                  (II) the cost-of-living 
                                adjustment determined under 
                                section 1(f)(3) for the 
                                calendar year in which the 
                                taxable year begins, determined 
                                by substituting ``2017'' for 
                                ``2016'' in subparagraph 
                                (A)(ii) thereof.
                 If any increase under this clause is not a 
                multiple of $50, such increase shall be rounded 
                to the next lowest multiple of $50.
  (d) Itemized deductions.--For purposes of this subtitle, the 
term ``itemized deductions'' means the deductions allowable 
under this chapter other than--
          (1) the deductions allowable in arriving at adjusted 
        gross income,
          (2) the deduction for personal exemptions provided by 
        section 151, and
          (3) any deduction provided in section 199A.
  (e) Election to itemize.--
          (1) In general.--Unless an individual makes an 
        election under this subsection for the taxable year, no 
        itemized deduction shall be allowed for the taxable 
        year. For purposes of this subtitle, the determination 
        of whether a deduction is allowable under this chapter 
        shall be made without regard to the preceding sentence.
          (2) Time and manner of election.--Any election under 
        this subsection shall be made on the taxpayer's return, 
        and the Secretary shall prescribe the manner of 
        signifying such election on the return.
          (3) Change of election.--Under regulations prescribed 
        by the Secretary, a change of election with respect to 
        itemized deductions for any taxable year may be made 
        after the filing of the return for such year. If the 
        spouse of the taxpayer filed a separate return for any 
        taxable year corresponding to the taxable year of the 
        taxpayer, the change shall not be allowed unless, in 
        accordance with such regulations--
                  (A) the spouse makes a change of election 
                with respect to itemized deductions, for the 
                taxable year covered in such separate return, 
                consistent with the change of treatment sought 
                by the taxpayer, and
                  (B) the taxpayer and [his spouse] the 
                taxpayer's spouse consent in writing to the 
                assessment (within such period as may be agreed 
                on with the Secretary) of any deficiency, to 
                the extent attributable to such change of 
                election, even though at the time of the filing 
                of such consent the assessment of such 
                deficiency would otherwise be prevented by the 
                operation of any law or rule of law.
        This paragraph shall not apply if the tax liability of 
        the taxpayer's spouse for the taxable year 
        corresponding to the taxable year of the taxpayer has 
        been compromised under section 7122.
  (f) Aged or blind additional amounts.--
          (1) Additional amounts for the aged.--The taxpayer 
        shall be entitled to an additional amount of $600--
                  (A) [for himself if he] for the taxpayer if 
                the taxpayer has attained age 65 before the 
                close of [his taxable year] the taxpayer's 
                taxable year , and
                  (B) for the spouse of the taxpayer if the 
                spouse has attained age 65 before the close of 
                the taxable year and an additional exemption is 
                allowable to the taxpayer for such spouse under 
                section 151(b).
          (2) Additional amount for blind.--The taxpayer shall 
        be entitled to an additional amount of $600--
                  (A) [for himself if he] for the taxpayer if 
                the taxpayer is blind at the close of the 
                taxable year, and
                  (B) for the spouse of the taxpayer if the 
                spouse is blind as of the close of the taxable 
                year and an additional exemption is allowable 
                to the taxpayer for such spouse under section 
                151(b).
        For purposes of subparagraph (B), if the spouse dies 
        during the taxable year the determination of whether 
        such spouse is blind shall be made as of the time of 
        such death.
          (3) Higher amount for certain unmarried 
        individuals.--In the case of an individual who is not 
        married and is not a surviving spouse, paragraphs (1) 
        and (2) shall be applied by substituting ``$750'' for 
        ``$600''.
          (4) Blindness defined.--For purposes of this 
        subsection, an individual is blind only if [his] the 
        individual's central visual acuity does not exceed 20/
        200 in the better eye with correcting lenses, or if 
        [his] the individual's visual acuity is greater than 
        20/200 but is accompanied by a limitation in the fields 
        of vision such that the widest diameter of the visual 
        field subtends an angle no greater than 20 degrees.
  (g) Marital status.--For purposes of this section, marital 
status shall be determined under section 7703.

           *       *       *       *       *       *       *


PART II--ITEMS SPECIFICALLY INCLUDED IN GROSS INCOME

           *       *       *       *       *       *       *


SEC. 86. SOCIAL SECURITY AND TIER 1 RAILROAD RETIREMENT BENEFITS.

  (a) In general.--
          (1) In general.--Except as provided in paragraph (2), 
        gross income for the taxable year of any taxpayer 
        described in subsection (b) (notwithstanding section 
        207 of the Social Security Act) includes social 
        security benefits in an amount equal to the lesser of--
                  (A) one-half of the social security benefits 
                received during the taxable year, or
                  (B) one-half of the excess described in 
                subsection (b)(1).
          (2) Additional amount.--In the case of a taxpayer 
        with respect to whom the amount determined under 
        subsection (b)(1)(A) exceeds the adjusted base amount, 
        the amount included in gross income under this section 
        shall be equal to the lesser of--
                  (A) the sum of--
                          (i) 85 percent of such excess, plus
                          (ii) the lesser of the amount 
                        determined under paragraph (1) or an 
                        amount equal to one-half of the 
                        difference between the adjusted base 
                        amount and the base amount of the 
                        taxpayer, or
                  (B) 85 percent of the social security 
                benefits received during the taxable year.
  (b) Taxpayers to whom subsection (a) applies.--
          (1) In general.--A taxpayer is described in this 
        subsection if--
                  (A) the sum of--
                          (i) the modified adjusted gross 
                        income of the taxpayer for the taxable 
                        year, plus
                          (ii) one-half of the social security 
                        benefits received during the taxable 
                        year, exceeds
                  (B) the base amount.
          (2) Modified adjusted gross income.--For purposes of 
        this subsection, the term ``modified adjusted gross 
        income'' means adjusted gross income--
                  (A) determined without regard to this section 
                and sections 135, 137, 221, 222, 911, 931, and 
                933, and
                  (B) increased by the amount of interest 
                received or accrued by the taxpayer during the 
                taxable year which is exempt from tax.
  (c) Base amount and adjusted base amount.--For purposes of 
this section--
          (1) Base amount.--The term ``base amount'' means--
                  (A) except as otherwise provided in this 
                paragraph, $25,000,
                  (B) $32,000 in the case of a joint return, 
                and
                  (C) zero in the case of a taxpayer who--
                          (i) is married as of the close of the 
                        taxable year (within the meaning of 
                        section 7703) but does not file a joint 
                        return for such year, and
                          (ii) does not live apart from [his 
                        spouse] the taxpayer's spouse at all 
                        times during the taxable year.
          (2) Adjusted base amount.--The term ``adjusted base 
        amount'' means--
                  (A) except as otherwise provided in this 
                paragraph, $34,000,
                  (B) $44,000 in the case of a joint return, 
                and
                  (C) zero in the case of a taxpayer described 
                in paragraph (1)(C).
  (d) Social security benefit.--
          (1) In general.--For purposes of this section, the 
        term ``social security benefit'' means any amount 
        received by the taxpayer by reason of entitlement to--
                  (A) a monthly benefit under title II of the 
                Social Security Act, or
                  (B) a tier 1 railroad retirement benefit.
          (2) Adjustment for repayments during year.--
                  (A) In general.--For purposes of this 
                section, the amount of social security benefits 
                received during any taxable year shall be 
                reduced by any repayment made by the taxpayer 
                during the taxable year of a social security 
                benefit previously received by the taxpayer 
                (whether or not such benefit was received 
                during the taxable year).
                  (B) Denial of deduction.--If (but for this 
                subparagraph) any portion of the repayments 
                referred to in subparagraph (A) would have been 
                allowable as a deduction for the taxable year 
                under section 165, such portion shall be 
                allowable as a deduction only to the extent it 
                exceeds the social security benefits received 
                by the taxpayer during the taxable year (and 
                not repaid during such taxable year).
          (3) Workmen's compensation benefits substituted for 
        social security benefits.--For purposes of this 
        section, if, by reason of section 224 of the Social 
        Security Act (or by reason of section 3(a)(1) of the 
        Railroad Retirement Act of 1974), any social security 
        benefit is reduced by reason of the receipt of a 
        benefit under a workmen's compensation act, the term 
        ``social security benefit'' includes that portion of 
        such benefit received under the workmen's compensation 
        act which equals such reduction.
          (4) Tier 1 railroad retirement benefit.--For purposes 
        of paragraph (1), the term ``tier 1 railroad retirement 
        benefit'' means--
                  (A) the amount of the annuity under the 
                Railroad Retirement Act of 1974 equal to the 
                amount of the benefit to which the taxpayer 
                would have been entitled under the Social 
                Security Act if all of the service after 
                December 31, 1936, of the employee (on whose 
                employment record the annuity is being paid) 
                had been included in the term ``employment'' as 
                defined in the Social Security Act, and
                  (B) a monthly annuity amount under section 
                3(f)(3) of the Railroad Retirement Act of 1974.
          (5) Effect of early delivery of benefit checks.--For 
        purposes of subsection (a), in any case where section 
        708 of the Social Security Act causes social security 
        benefit checks to be delivered before the end of the 
        calendar month for which they are issued, the benefits 
        involved shall be deemed to have been received in the 
        succeeding calendar month.
  (e) Limitation on amount included where taxpayer receives 
lump-sum payment.--
          (1) Limitation.--If--
                  (A) any portion of a lump-sum payment of 
                social security benefits received during the 
                taxable year is attributable to prior taxable 
                years, and
                  (B) the taxpayer makes an election under this 
                subsection for the taxable year,
        then the amount included in gross income under this 
        section for the taxable year by reason of the receipt 
        of such portion shall not exceed the sum of the 
        increases in gross income under this chapter for prior 
        taxable years which would result solely from taking 
        into account such portion in the taxable years to which 
        it is attributable.
          (2) Special rules.--
                  (A) Year to which benefit attributable.--For 
                purposes of this subsection, a social security 
                benefit is attributable to a taxable year if 
                the generally applicable payment date for such 
                benefit occurred during such taxable year.
                  (B) Election.--An election under this 
                subsection shall be made at such time and in 
                such manner as the Secretary shall by 
                regulations prescribe. Such election, once 
                made, may be revoked only with the consent of 
                the Secretary.
  (f) Treatment as pension or annuity for certain purposes.--
For purposes of--
          (1) section 22(c)(3)(A) (relating to reduction for 
        amounts received as pension or annuity),
          (2) section 32(c)(2) (defining earned income),
          (3) section 219(f)(1) (defining compensation), and
          (4) section 911(b)(1) (defining foreign earned 
        income),
any social security benefit shall be treated as an amount 
received as a pension or annuity.

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PART III--ITEMS SPECIFICALLY EXCLUDED FROM GROSS INCOME

           *       *       *       *       *       *       *


SEC. 105. AMOUNTS RECEIVED UNDER ACCIDENT AND HEALTH PLANS.

  (a) Amounts attributable to employer contributions.--Except 
as otherwise provided in this section, amounts received by an 
employee through accident or health insurance for personal 
injuries or sickness shall be included in gross income to the 
extent such amounts (1) are attributable to contributions by 
the employer which were not includible in the gross income of 
the employee, or (2) are paid by the employer.
  (b) Amounts expended for medical care.--Except in the case of 
amounts attributable to (and not in excess of) deductions 
allowed under section 213 (relating to medical, etc., expenses) 
for any prior taxable year, gross income does not include 
amounts referred to in subsection (a) if such amounts are paid, 
directly or indirectly, to the taxpayer to reimburse the 
taxpayer for expenses incurred [by him] for the medical care 
(as defined in section 213(d)) of the taxpayer, [his spouse, 
his dependents] the taxpayer's spouse, the taxpayer's 
dependents (as defined in section 152, determined without 
regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof), 
and any child (as defined in section 152(f)(1)) of the taxpayer 
who as of the end of the taxable year has not attained age 27. 
Any child to whom section 152(e) applies shall be treated as a 
dependent of both parents for purposes of this subsection.
  (c) Payments unrelated to absence from work.--Gross income 
does not include amounts referred to in subsection (a) to the 
extent such amounts--
          (1) constitute payment for the permanent loss or loss 
        of use of a member or function of the body, or the 
        permanent disfigurement, of the taxpayer, [his spouse] 
        the taxpayer's spouse , or a dependent (as defined in 
        section 152, determined without regard to subsections 
        (b)(1), (b)(2), and (d)(1)(B) thereof), and
          (2) are computed with reference to the nature of the 
        injury without regard to the period the employee is 
        absent from work.
  (e) Accident and health plans.--For purposes of this section 
and section 104--
          (1) amounts received under an accident or health plan 
        for employees, and
          (2) amounts received from a sickness and disability 
        fund for employees maintained under the law of a State 
        or the District of Columbia,
shall be treated as amounts received through accident or health 
insurance.
  (f) Rules for application of section 213.--For purposes of 
section 213(a) (relating to medical, dental, etc., expenses) 
amounts excluded from gross income under subsection (c) shall 
not be considered as compensation (by insurance or otherwise) 
for expenses paid for medical care.
  (g) Self-employed individual not considered an employee.--For 
purposes of this section, the term ``employee'' does not 
include an individual who is an employee within the meaning of 
section 401(c)(1) (relating to self-employed individuals).
  (h) Amount paid to highly compensated individuals under a 
discriminatory self-insured medical expense reimbursement 
plan.--
          (1) In general.--In the case of amounts paid to a 
        highly compensated individual under a self-insured 
        medical reimbursement plan which does not satisfy the 
        requirements of paragraph (2) for a plan year, 
        subsection (b) shall not apply to such amounts to the 
        extent they constitute an excess reimbursement of such 
        highly compensated individual.
          (2) Prohibition of discrimination.--A self-insured 
        medical reimbursement plan satisfies the requirements 
        of this paragraph only if--
                  (A) the plan does not discriminate in favor 
                of highly compensated individuals as to 
                eligibility to participate; and
                  (B) the benefits provided under the plan do 
                not discriminate in favor of participants who 
                are highly compensated individuals.
          (3) Nondiscriminatory eligibility classifications.--
                  (A) In general.--A self-insured medical 
                reimbursement plan does not satisfy the 
                requirements of subparagraph (A) of paragraph 
                (2) unless such plan benefits--
                          (i) 70 percent or more of all 
                        employees, or 80 percent or more of all 
                        the employees who are eligible to 
                        benefit under the plan if 70 percent or 
                        more of all employees are eligible to 
                        benefit under the plan; or
                          (ii) such employees as qualify under 
                        a classification set up by the employer 
                        and found by the Secretary not to be 
                        discriminatory in favor of highly 
                        compensated individuals.
                  (B) Exclusion of certain employees.--For 
                purposes of subparagraph (A), there may be 
                excluded from consideration--
                          (i) employees who have not completed 
                        3 years of service;
                          (ii) employees who have not attained 
                        age 25;
                          (iii) part-time or seasonal 
                        employees;
                          (iv) employees not included in the 
                        plan who are included in a unit of 
                        employees covered by an agreement 
                        between employee representatives and 
                        one or more employers which the 
                        Secretary finds to be a collective 
                        bargaining agreement, if accident and 
                        health benefits were the subject of 
                        good faith bargaining between such 
                        employee representatives and such 
                        employer or employers; and
                          (v) employees who are nonresident 
                        aliens and who receive no earned income 
                        (within the meaning of section 
                        911(d)(2)) from the employer which 
                        constitutes income from sources within 
                        the United States (within the meaning 
                        of section 861(a)(3)).
          (4) Nondiscriminatory benefits.--A self-insured 
        medical reimbursement plan does not meet the 
        requirements of subparagraph (B) of paragraph (2) 
        unless all benefits provided for participants who are 
        highly compensated individuals are provided for all 
        other participants.
          (5) Highly compensated individual defined.--For 
        purposes of this subsection, the term ``highly 
        compensated individual'' means an individual who is--
                  (A) one of the 5 highest paid officers,
                  (B) a shareholder who owns (with the 
                application of section 318) more than 10 
                percent in value of the stock of the employer, 
                or
                  (C) among the highest paid 25 percent of all 
                employees (other than employees described in 
                paragraph (3)(B) who are not participants).
          (6) Self-insured medical reimbursement plan.--The 
        term ``self-insured medical reimbursement plan'' means 
        a plan of an employer to reimburse employees for 
        expenses referred to in subsection (b) for which 
        reimbursement is not provided under a policy of 
        accident and health insurance.
          (7) Excess reimbursement of highly compensated 
        individual.--For purposes of this section, the excess 
        reimbursement of a highly compensated individual which 
        is attributable to a self-insured medical reimbursement 
        plan is--
                  (A) in the case of a benefit available to 
                highly compensated individuals but not to all 
                other participants (or which otherwise fails to 
                satisfy the requirements of paragraph (2)(B)), 
                the amount reimbursed under the plan to the 
                employee with respect to such benefit, and
                  (B) in the case of benefits (other than 
                benefits described in subparagraph (A)) paid to 
                a highly compensated individual by a plan which 
                fails to satisfy the requirements of paragraph 
                (2), the total amount reimbursed to the highly 
                compensated individual for the plan year 
                multiplied by a fraction--
                          (i) the numerator of which is the 
                        total amount reimbursed to all 
                        participants who are highly compensated 
                        individuals under the plan for the plan 
                        year, and
                          (ii) the denominator of which is the 
                        total amount reimbursed to all 
                        employees under the plan for such plan 
                        year.
        In determining the fraction under subparagraph (B), 
        there shall not be taken into account any reimbursement 
        which is attributable to a benefit described in 
        subparagraph (A).
          (8) Certain controlled groups, etc..--All employees 
        who are treated as employed by a single employer under 
        subsection (b), (c), or (m) of section 414 shall be 
        treated as employed by a single employer for purposes 
        of this section.
          (9) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary to carry out the 
        provisions of this section.
          (10) Time of inclusion.--Any amount paid for a plan 
        year that is included in income by reason of this 
        subsection shall be treated as received or accrued in 
        the taxable year of the participant in which the plan 
        year ends.
  (i) Sick pay under Railroad Unemployment Insurance Act.--
Notwithstanding any other provision of law, gross income 
includes benefits paid under section 2(a) of the Railroad 
Unemployment Insurance Act for days of sickness; except to the 
extent such sickness (as determined in accordance with 
standards prescribed by the Railroad Retirement Board) is the 
result of on-the-job injury.
  (j) Special rule for certain governmental plans.--
          (1) In general.--For purposes of subsection (b), 
        amounts paid (directly or indirectly) to a qualified 
        taxpayer from an accident or health plan described in 
        paragraph (2) shall not fail to be excluded from gross 
        income solely because such plan, on or before January 
        1, 2008, provides for reimbursements of health care 
        expenses of a deceased employee's beneficiary (other 
        than an individual described in paragraph (3)(B)).
          (2) Plan described.--An accident or health plan is 
        described in this paragraph if such plan is funded by a 
        medical trust that is established in connection with a 
        public retirement system or established by or on behalf 
        of a State or political subdivision thereof and that--
                  (A) has been authorized by a State 
                legislature, or
                  (B) has received a favorable ruling from the 
                Internal Revenue Service that the trust's 
                income is not includible in gross income under 
                section 115 or 501(c)(9).
          (3) Qualified taxpayer.--For purposes of paragraph 
        (1), with respect to an accident or health plan 
        described in paragraph (2), the term ``qualified 
        taxpayer'' means a taxpayer who is--
                  (A) an employee, or
                  (B) the spouse, dependent (as defined for 
                purposes of subsection (b)), or child (as 
                defined for purposes of such subsection) of an 
                employee.

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SEC. 119. MEALS OR LODGING FURNISHED FOR THE CONVENIENCE OF THE 
                    EMPLOYER.

  (a) Meals and Lodging Furnished to Employee[, His Spouse, and 
His Dependents] and the Employee's Spouse and Dependents, 
Pursuant to Employment.--There shall be excluded from gross 
income of an employee the value of any meals or lodging 
furnished to [him, his spouse, or any of his dependents by or 
on behalf of his employer] the employee or the employee's 
spouse or dependents by or on behalf of the employer of the 
employee for the convenience of the employer, but only if--
          (1) in the case of meals, the meals are furnished on 
        the business premises of the employer, or
          (2) in the case of lodging, the employee is required 
        to accept such lodging on the business premises of 
        [his] the employee's employer as a condition of [his] 
        the employee's employment.
  (b) Special rules.--For purposes of subsection (a)--
          (1) Provisions of employment contract or State 
        statute not to be determinative.--In determining 
        whether meals or lodging are furnished for the 
        convenience of the employer, the provisions of an 
        employment contract or of a State statute fixing terms 
        of employment shall not be determinative of whether the 
        meals or lodging are intended as compensation.
          (2) Certain factors not taken into account with 
        respect to meals.--In determining whether meals are 
        furnished for the convenience of the employer, the fact 
        that a charge is made for such meals, and the fact that 
        the employee may accept or decline such meals, shall 
        not be taken into account.
          (3) Certain fixed charges for meals.--
                  (A) In general.--If--
                          (i) an employee is required to pay on 
                        a periodic basis a fixed charge for his 
                        meals, and
                          (ii) such meals are furnished by the 
                        employer for the convenience of the 
                        employer,
                there shall be excluded from the employee's 
                gross income an amount equal to such fixed 
                charge.
                  (B) Application of subparagraph (A).--
                Subparagraph (A) shall apply--
                          (i) whether the employee pays the 
                        fixed charge out of his stated 
                        compensation or out of his own funds, 
                        and
                          (ii) only if the employee is required 
                        to make the payment whether he accepts 
                        or declines the meals.
          (4) Meals furnished to employees on business premises 
        where meals of most employees are otherwise 
        excludable.--All meals furnished on the business 
        premises of an employer to such employer's employees 
        shall be treated as furnished for the convenience of 
        the employer if, without regard to this paragraph, more 
        than half of the employees to whom such meals are 
        furnished on such premises are furnished such meals for 
        the convenience of the employer.
  (c) Employees living in certain camps.--
          (1) In general.--In the case of an individual who is 
        furnished lodging in a camp located in a foreign 
        country by or on behalf of his employer, such camp 
        shall be considered to be part of the business premises 
        of the employer.
          (2) Camp.--For purposes of this section, a camp 
        constitutes lodging which is--
                  (A) provided by or on behalf of the employer 
                for the convenience of the employer because the 
                place at which such individual renders services 
                is in a remote area where satisfactory housing 
                is not available on the open market,
                  (B) located, as near as practicable, in the 
                vicinity of the place at which such individual 
                renders services, and
                  (C) furnished in a common area (or enclave) 
                which is not available to the public and which 
                normally accommodates 10 or more employees.
  (d) Lodging furnished by certain educational institutions to 
employees.--
          (1) In general.--In the case of an employee of an 
        educational institution, gross income shall not include 
        the value of qualified campus lodging furnished to such 
        employee during the taxable year.
          (2) Exception in cases of inadequate rent.--Paragraph 
        (1) shall not apply to the extent of the excess of--
                  (A) the lesser of--
                          (i) 5 percent of the appraised value 
                        of the qualified campus lodging, or
                          (ii) the average of the rentals paid 
                        by individuals (other than employees or 
                        students of the educational 
                        institution) during such calendar year 
                        for lodging provided by the educational 
                        institution which is comparable to the 
                        qualified campus lodging provided to 
                        the employee, over
                  (B) the rent paid by the employee for the 
                qualified campus lodging during such calendar 
                year.
        The appraised value under subparagraph (A)(i) shall be 
        determined as of the close of the calendar year in 
        which the taxable year begins, or, in the case of a 
        rental period not greater than 1 year, at any time 
        during the calendar year in which such period begins.
          (3) Qualified campus lodging.--For purposes of this 
        subsection, the term ``qualified campus lodging'' means 
        lodging to which subsection (a) does not apply and 
        which is--
                  (A) located on, or in the proximity of, a 
                campus of the educational institution, and
                  (B) furnished to the employee, [his spouse, 
                and any of his dependents] the employee's 
                spouse, and any of the employee's dependents by 
                or on behalf of such institution for use as a 
                residence.
          (4) Educational institution, etc..--For purposes of 
        this subsection--
                  (A) In general.--The term ``educational 
                institution'' means--
                          (i) an institution described in 
                        section 170(b)(1)(A)(ii) (or an entity 
                        organized under State law and composed 
                        of public institutions so described), 
                        or
                          (ii) an academic health center.
                  (B) Academic health center.--For purposes of 
                subparagraph (A), the term ``academic health 
                center'' means an entity--
                          (i) which is described in section 
                        170(b)(1)(A)(iii),
                          (ii) which receives (during the 
                        calendar year in which the taxable year 
                        of the taxpayer begins) payments under 
                        subsection (d)(5)(B) or (h) of section 
                        1886 of the Social Security Act 
                        (relating to graduate medical 
                        education), and
                          (iii) which has as one of its 
                        principal purposes or functions the 
                        providing and teaching of basic and 
                        clinical medical science and research 
                        with the entity's own faculty.

           *       *       *       *       *       *       *


SEC. 121. EXCLUSION OF GAIN FROM SALE OF PRINCIPAL RESIDENCE.

  (a) Exclusion.--Gross income shall not include gain from the 
sale or exchange of property if, during the 5-year period 
ending on the date of the sale or exchange, such property has 
been owned and used by the taxpayer as the taxpayer's principal 
residence for periods aggregating 2 years or more.
  (b) Limitations.--
          (1) In general.--The amount of gain excluded from 
        gross income under subsection (a) with respect to any 
        sale or exchange shall not exceed $250,000.
          (2) Special rules for joint returns.--In the case of 
        a [husband and wife who make] married couple who makes 
        a joint return for the taxable year of the sale or 
        exchange of the property--
                  (A) $500,000 Limitation for certain joint 
                returns.--Paragraph (1) shall be applied by 
                substituting ``$500,000'' for ``$250,000'' if--
                          (i) either spouse meets the ownership 
                        requirements of subsection (a) with 
                        respect to such property;
                          (ii) both spouses meet the use 
                        requirements of subsection (a) with 
                        respect to such property; and
                          (iii) neither spouse is ineligible 
                        for the benefits of subsection (a) with 
                        respect to such property by reason of 
                        paragraph (3).
                  (B) Other joint returns.--If such spouses do 
                not meet the requirements of subparagraph (A), 
                the limitation under paragraph (1) shall be the 
                sum of the limitations under paragraph (1) to 
                which each spouse would be entitled if such 
                spouses had not been married. For purposes of 
                the preceding sentence, each spouse shall be 
                treated as owning the property during the 
                period that either spouse owned the property.
          (3) Application to only 1 sale or exchange every 2 
        years.--Subsection (a) shall not apply to any sale or 
        exchange by the taxpayer if, during the 2-year period 
        ending on the date of such sale or exchange, there was 
        any other sale or exchange by the taxpayer to which 
        subsection (a) applied.
          (4) Special rule for certain sales by surviving 
        spouses.--In the case of a sale or exchange of property 
        by an unmarried individual whose spouse is deceased on 
        the date of such sale, paragraph (1) shall be applied 
        by substituting ``$500,000'' for ``$250,000'' if such 
        sale occurs not later than 2 years after the date of 
        death of such spouse and the requirements of paragraph 
        (2)(A) were met immediately before such date of death.
          (5) Exclusion of gain allocated to nonqualified 
        use.--
                  (A) In general.--Subsection (a) shall not 
                apply to so much of the gain from the sale or 
                exchange of property as is allocated to periods 
                of nonqualified use.
                  (B) Gain allocated to periods of nonqualified 
                use.--For purposes of subparagraph (A), gain 
                shall be allocated to periods of nonqualified 
                use based on the ratio which--
                          (i) the aggregate periods of 
                        nonqualified use during the period such 
                        property was owned by the taxpayer, 
                        bears to
                          (ii) the period such property was 
                        owned by the taxpayer.
                  (C) Period of nonqualified use.--For purposes 
                of this paragraph--
                          (i) In general.--The term ``period of 
                        nonqualified use'' means any period 
                        (other than the portion of any period 
                        preceding January 1, 2009) during which 
                        the property is not used as the 
                        principal residence of the taxpayer or 
                        the taxpayer's spouse or former spouse.
                          (ii) Exceptions.--The term ``period 
                        of nonqualified use'' does not 
                        include--
                                  (I) any portion of the 5-year 
                                period described in subsection 
                                (a) which is after the last 
                                date that such property is used 
                                as the principal residence of 
                                the taxpayer or the taxpayer's 
                                spouse,
                                  (II) any period (not to 
                                exceed an aggregate period of 
                                10 years) during which the 
                                taxpayer or the taxpayer's 
                                spouse is serving on qualified 
                                official extended duty (as 
                                defined in subsection 
                                (d)(9)(C)) described in clause 
                                (i), (ii), or (iii) of 
                                subsection (d)(9)(A), and
                                  (III) any other period of 
                                temporary absence (not to 
                                exceed an aggregate period of 2 
                                years) due to change of 
                                employment, health conditions, 
                                or such other unforeseen 
                                circumstances as may be 
                                specified by the Secretary.
                  (D) Coordination with recognition of gain 
                attributable to depreciation.--For purposes of 
                this paragraph--
                          (i) subparagraph (A) shall be applied 
                        after the application of subsection 
                        (d)(6), and
                          (ii) subparagraph (B) shall be 
                        applied without regard to any gain to 
                        which subsection (d)(6) applies.
  (c) Exclusion for taxpayers failing to meet certain 
requirements.--
          (1) In general.--In the case of a sale or exchange to 
        which this subsection applies, the ownership and use 
        requirements of subsection (a), and subsection (b)(3), 
        shall not apply; but the dollar limitation under 
        paragraph (1) or (2) of subsection (b), whichever is 
        applicable, shall be equal to--
                  (A) the amount which bears the same ratio to 
                such limitation (determined without regard to 
                this paragraph) as
                  (B)(i) the shorter of--
                          (I) the aggregate periods, during the 
                        5-year period ending on the date of 
                        such sale or exchange, such property 
                        has been owned and used by the taxpayer 
                        as the taxpayer's principal residence; 
                        or
                          (II) the period after the date of the 
                        most recent prior sale or exchange by 
                        the taxpayer to which subsection (a) 
                        applied and before the date of such 
                        sale or exchange, bears to
                  (ii) 2 years.
          (2) Sales and exchanges to which subsection 
        applies.--This subsection shall apply to any sale or 
        exchange if--
                  (A) subsection (a) would not (but for this 
                subsection) apply to such sale or exchange by 
                reason of--
                          (i) a failure to meet the ownership 
                        and use requirements of subsection (a), 
                        or
                          (ii) subsection (b)(3), and
                  (B) such sale or exchange is by reason of a 
                change in place of employment, health, or, to 
                the extent provided in regulations, unforeseen 
                circumstances.
  (d) Special rules.--
          (1) Joint returns.--If a [husband and wife make] 
        married couple makes a joint return for the taxable 
        year of the sale or exchange of the property, 
        subsections (a) and (c) shall apply if either spouse 
        meets the ownership and use requirements of subsection 
        (a) with respect to such property.
          (2) Property of deceased spouse.--For purposes of 
        this section, in the case of an unmarried individual 
        whose spouse is deceased on the date of the sale or 
        exchange of property, the period such unmarried 
        individual owned and used such property shall include 
        the period such deceased spouse owned and used such 
        property before death.
          (3) Property owned by spouse or former spouse.--For 
        purposes of this section--
                  (A) Property transferred to individual from 
                spouse or former spouse.--In the case of an 
                individual holding property transferred to such 
                individual in a transaction described in 
                section 1041(a), the period such individual 
                owns such property shall include the period the 
                transferor owned the property.
                  (B) Property used by former spouse pursuant 
                to divorce decree, etc..--Solely for purposes 
                of this section, an individual shall be treated 
                as using property as such individual's 
                principal residence during any period of 
                ownership while such individual's spouse or 
                former spouse is granted use of the property 
                under a divorce or separation instrument.
                  (C) Divorce or separation instrument.--For 
                purposes of this paragraph, the term ``divorce 
                or separation instrument'' means--
                          (i) a decree of divorce or separate 
                        maintenance or a written instrument 
                        incident to such a decree,
                          (ii) a written separation agreement, 
                        or
                          (iii) a decree (not described in 
                        clause (i)) requiring a spouse to make 
                        payments for the support or maintenance 
                        of the other spouse.
          (4) Tenant-stockholder in cooperative housing 
        corporation.--For purposes of this section, if the 
        taxpayer holds stock as a tenant-stockholder (as 
        defined in section 216) in a cooperative housing 
        corporation (as defined in such section), then--
                  (A) the holding requirements of subsection 
                (a) shall be applied to the holding of such 
                stock, and
                  (B) the use requirements of subsection (a) 
                shall be applied to the house or apartment 
                which the taxpayer was entitled to occupy as 
                such stockholder.
          (5) Involuntary conversions.--
                  (A) In general.--For purposes of this 
                section, the destruction, theft, seizure, 
                requisition, or condemnation of property shall 
                be treated as the sale of such property.
                  (B) Application of section 1033.--In applying 
                section 1033 (relating to involuntary 
                conversions), the amount realized from the sale 
                or exchange of property shall be treated as 
                being the amount determined without regard to 
                this section, reduced by the amount of gain not 
                included in gross income pursuant to this 
                section.
                  (C) Property acquired after involuntary 
                conversion.--If the basis of the property sold 
                or exchanged is determined (in whole or in 
                part) under section 1033(b) (relating to basis 
                of property acquired through involuntary 
                conversion), then the holding and use by the 
                taxpayer of the converted property shall be 
                treated as holding and use by the taxpayer of 
                the property sold or exchanged.
          (6) Recognition of gain attributable to 
        depreciation.--Subsection (a) shall not apply to so 
        much of the gain from the sale of any property as does 
        not exceed the portion of the depreciation adjustments 
        (as defined in section 1250(b)(3)) attributable to 
        periods after May 6, 1997, in respect of such property.
          (7) Determination of use during periods of out-of-
        residence care.--In the case of a taxpayer who--
                  (A) becomes physically or mentally incapable 
                of self-care, and
                  (B) owns property and uses such property as 
                the taxpayer's principal residence during the 
                5-year period described in subsection (a) for 
                periods aggregating at least 1 year,
        then the taxpayer shall be treated as using such 
        property as the taxpayer's principal residence during 
        any time during such 5-year period in which the 
        taxpayer owns the property and resides in any facility 
        (including a nursing home) licensed by a State or 
        political subdivision to care for an individual in the 
        taxpayer's condition.
          (8) Sales of remainder interests.--For purposes of 
        this section--
                  (A) In general.--At the election of the 
                taxpayer, this section shall not fail to apply 
                to the sale or exchange of an interest in a 
                principal residence by reason of such interest 
                being a remainder interest in such residence, 
                but this section shall not apply to any other 
                interest in such residence which is sold or 
                exchanged separately.
                  (B) Exception for sales to related parties.--
                Subparagraph (A) shall not apply to any sale 
                to, or exchange with, any person who bears a 
                relationship to the taxpayer which is described 
                in section 267(b) or 707(b).
          (9) Uniformed services, Foreign Service, and 
        intelligence community.--
                  (A) In general.--At the election of an 
                individual with respect to a property, the 
                running of the 5-year period described in 
                subsections (a) and (c)(1)(B) and paragraph (7) 
                of this subsection with respect to such 
                property shall be suspended during any period 
                that such individual or such individual's 
                spouse is serving on qualified official 
                extended duty--
                          (i) as a member of the uniformed 
                        services,
                          (ii) as a member of the Foreign 
                        Service of the United States, or
                          (iii) as an employee of the 
                        intelligence community.
                  (B) Maximum period of suspension.--The 5-year 
                period described in subsection (a) shall not be 
                extended more than 10 years by reason of 
                subparagraph (A).
                  (C) Qualified official extended duty.--For 
                purposes of this paragraph--
                          (i) In general.--The term ``qualified 
                        official extended duty'' means any 
                        extended duty while serving at a duty 
                        station which is at least 50 miles from 
                        such property or while residing under 
                        Government orders in Government 
                        quarters.
                          (ii) Uniformed services.--The term 
                        ``uniformed services'' has the meaning 
                        given such term by section 101(a)(5) of 
                        title 10, United States Code, as in 
                        effect on the date of the enactment of 
                        this paragraph.
                          (iii) Foreign Service of the United 
                        States.--The term ``member of the 
                        Foreign Service of the United States'' 
                        has the meaning given the term ``member 
                        of the Service'' by paragraph (1), (2), 
                        (3), (4), or (5) of section 103 of the 
                        Foreign Service Act of 1980, as in 
                        effect on the date of the enactment of 
                        this paragraph.
                          (iv) Employee of intelligence 
                        community.--The term ``employee of the 
                        intelligence community'' means an 
                        employee (as defined by section 2105 of 
                        title 5, United States Code) of--
                                  (I) the Office of the 
                                Director of National 
                                Intelligence,
                                  (II) the Central Intelligence 
                                Agency,
                                  (III) the National Security 
                                Agency,
                                  (IV) the Defense Intelligence 
                                Agency,
                                  (V) the National Geospatial-
                                Intelligence Agency,
                                  (VI) the National 
                                Reconnaissance Office,
                                  (VII) any other office within 
                                the Department of Defense for 
                                the collection of specialized 
                                national intelligence through 
                                reconnaissance programs,
                                  (VIII) any of the 
                                intelligence elements of the 
                                Army, the Navy, the Air Force, 
                                the Marine Corps, the Federal 
                                Bureau of Investigation, the 
                                Department of Treasury, the 
                                Department of Energy, and the 
                                Coast Guard,
                                  (IX) the Bureau of 
                                Intelligence and Research of 
                                the Department of State, or
                                  (X) any of the elements of 
                                the Department of Homeland 
                                Security concerned with the 
                                analyses of foreign 
                                intelligence information.
                          (v) Extended duty.--The term 
                        ``extended duty'' means any period of 
                        active duty pursuant to a call or order 
                        to such duty for a period in excess of 
                        90 days or for an indefinite period.
                  (D) Special rules relating to election.--
                          (i) Election limited to 1 property at 
                        a time.--An election under subparagraph 
                        (A) with respect to any property may 
                        not be made if such an election is in 
                        effect with respect to any other 
                        property.
                          (ii) Revocation of election.--An 
                        election under subparagraph (A) may be 
                        revoked at any time.
          (10) Property acquired in like-kind exchange.--If a 
        taxpayer acquires property in an exchange with respect 
        to which gain is not recognized (in whole or in part) 
        to the taxpayer under subsection (a) or (b) of section 
        1031, subsection (a) shall not apply to the sale or 
        exchange of such property by such taxpayer (or by any 
        person whose basis in such property is determined, in 
        whole or in part, by reference to the basis in the 
        hands of such taxpayer) during the 5-year period 
        beginning with the date of such acquisition.
          (12) Peace Corps.--
                  (A) In general.--At the election of an 
                individual with respect to a property, the 
                running of the 5-year period described in 
                subsections (a) and (c)(1)(B) and paragraph (7) 
                of this subsection with respect to such 
                property shall be suspended during any period 
                that such individual or such individual's 
                spouse is serving outside the United States--
                          (i) on qualified official extended 
                        duty (as defined in paragraph (9)(C)) 
                        as an employee of the Peace Corps, or
                          (ii) as an enrolled volunteer or 
                        volunteer leader under section 5 or 6 
                        (as the case may be) of the Peace Corps 
                        Act (22 U.S.C. 2504, 2505).
                  (B) Applicable rules.--For purposes of 
                subparagraph (A), rules similar to the rules of 
                subparagraphs (B) and (D) of paragraph (9) 
                shall apply.
  (e) Denial of exclusion for expatriates.--This section shall 
not apply to any sale or exchange by an individual if the 
treatment provided by section 877(a)(1) applies to such 
individual.
  (f) Election to have section not apply.--This section shall 
not apply to any sale or exchange with respect to which the 
taxpayer elects not to have this section apply.
  (g) Residences acquired in rollovers under section 1034.--For 
purposes of this section, in the case of property the 
acquisition of which by the taxpayer resulted under section 
1034 (as in effect on the day before the date of the enactment 
of this section) in the nonrecognition of any part of the gain 
realized on the sale or exchange of another residence, in 
determining the period for which the taxpayer has owned and 
used such property as the taxpayer's principal residence, there 
shall be included the aggregate periods for which such other 
residence (and each prior residence taken into account under 
section 1223(6) in determining the holding period of such 
property) had been so owned and used.

           *       *       *       *       *       *       *


SEC. 129. DEPENDENT CARE ASSISTANCE PROGRAMS.

  (a) Exclusion.--
          (1) In general.--Gross income of an employee does not 
        include amounts paid or incurred by the employer for 
        dependent care assistance provided to such employee if 
        the assistance is furnished pursuant to a program which 
        is described in subsection (d).
          (2) Limitation of exclusion.--
                  (A) In general.--The amount which may be 
                excluded under paragraph (1) for dependent care 
                assistance with respect to dependent care 
                services provided during a taxable year shall 
                not exceed $5,000 ($2,500 in the case of a 
                separate return by a married individual).
                  (B) Year of inclusion.--The amount of any 
                excess under subparagraph (A) shall be included 
                in gross income in the taxable year in which 
                the dependent care services were provided (even 
                if payment of dependent care assistance for 
                such services occurs in a subsequent taxable 
                year).
                  (C) Marital status.--For purposes of this 
                paragraph, marital status shall be determined 
                under the rules of paragraphs (3) and (4) of 
                section 21(e).
  (b) Earned income limitation.--
          (1) In general.--The amount excluded from the income 
        of an employee under subsection (a) for any taxable 
        year shall not exceed--
                  (A) in the case of an employee who is not 
                married at the close of such taxable year, the 
                earned income of such employee for such taxable 
                year, or
                  (B) in the case of an employee who is married 
                at the close of such taxable year, the lesser 
                of--
                          (i) the earned income of such 
                        employee for such taxable year, or
                          (ii) the earned income of the spouse 
                        of such employee for such taxable year.
          (2) Special rule for certain spouses.--For purposes 
        of paragraph (1), the provisions of section 21(d)(2) 
        shall apply in determining the earned income of a 
        spouse who is a student or incapable of caring for 
        [himself] the spouse's self .
  (c) Payments to related individuals.--No amount paid or 
incurred during the taxable year of an employee by an employer 
in providing dependent care assistance to such employee shall 
be excluded under subsection (a) if such amount was paid or 
incurred to an individual--
          (1) with respect to whom, for such taxable year, a 
        deduction is allowable under section 151(c) (relating 
        to personal exemptions for dependents) to such employee 
        or the spouse of such employee, or
          (2) who is a child of such employee (within the 
        meaning of section 152(f)(1)) under the age of 19 at 
        the close of such taxable year.
  (d) Dependent care assistance program.--
          (1) In general.--For purposes of this section a 
        dependent care assistance program is a separate written 
        plan of an employer for the exclusive benefit of his 
        employees to provide such employees with dependent care 
        assistance which meets the requirements of paragraphs 
        (2) through (8) of this subsection. If any plan would 
        qualify as a dependent care assistance program but for 
        a failure to meet the requirements of this subsection, 
        then, notwithstanding such failure, such plan shall be 
        treated as a dependent care assistance program in the 
        case of employees who are not highly compensated 
        employees.
          (2) Discrimination.--The contributions or benefits 
        provided under the plan shall not discriminate in favor 
        of employees who are highly compensated employees 
        (within the meaning of section 414(q)) or their 
        dependents.
          (3) Eligibility.--The program shall benefit employees 
        who qualify under a classification set up by the 
        employer and found by the Secretary not to be 
        discriminatory in favor of employees described in 
        paragraph (2), or their dependents.
          (4) Principal shareholders or owners.--Not more than 
        25 percent of the amounts paid or incurred by the 
        employer for dependent care assistance during the year 
        may be provided for the class of individuals who are 
        shareholders or owners (or their spouses or 
        dependents), each of whom (on any day of the year) owns 
        more than 5 percent of the stock or of the capital or 
        profits interest in the employer.
          (5) No funding required.--A program referred to in 
        paragraph (1) is not required to be funded.
          (6) Notification of eligible employees.--Reasonable 
        notification of the availability and terms of the 
        program shall be provided to eligible employees.
          (7) Statement of expenses.--The plan shall furnish to 
        an employee, on or before January 31, a written 
        statement showing the amounts paid or expenses incurred 
        by the employer in providing dependent care assistance 
        to such employee during the previous calendar year.
          (8) Benefits.--
                  (A) In general.--A plan meets the 
                requirements of this paragraph if the average 
                benefits provided to employees who are not 
                highly compensated employees under all plans of 
                the employer is at least 55 percent of the 
                average benefits provided to highly compensated 
                employees under all plans of the employer.
                  (B) Salary reduction agreements.--For 
                purposes of subparagraph (A), in the case of 
                any benefits provided through a salary 
                reduction agreement, a plan may disregard any 
                employees whose compensation is less than 
                $25,000. For purposes of this subparagraph, the 
                term ``compensation'' has the meaning given 
                such term by section 414(q)(4), except that, 
                under rules prescribed by the Secretary, an 
                employer may elect to determine compensation on 
                any other basis which does not discriminate in 
                favor of highly compensated employees.
          (9) Excluded employees.--For purposes of paragraphs 
        (3) and (8), there shall be excluded from 
        consideration--
                  (A) subject to rules similar to the rules of 
                section 410(b)(4), employees who have not 
                attained the age of 21 and completed 1 year of 
                service (as defined in section 410(a)(3)), and
                  (B) employees not included in a dependent 
                care assistance program who are included in a 
                unit of employees covered by an agreement which 
                the Secretary finds to be a collective 
                bargaining agreement between employee 
                representatives and 1 or more employees, if 
                there is evidence that dependent care benefits 
                were the subject of good faith bargaining 
                between such employee representatives and such 
                employer or employers.
  (e) Definitions and special rules.--For purposes of this 
section--
          (1) Dependent care assistance.--The term ``dependent 
        care assistance'' means the payment of, or provision 
        of, those services which if paid for by the employee 
        would be considered employment-related expenses under 
        section 21(b)(2) (relating to expenses for household 
        and dependent care services necessary for gainful 
        employment).
          (2) Earned income.--The term ``earned income'' shall 
        have the meaning given such term in section 32(c)(2), 
        but such term shall not include any amounts paid or 
        incurred by an employer for dependent care assistance 
        to an employee.
          (3) Employee.--The term ``employee'' includes, for 
        any year, an individual who is an employee within the 
        meaning of section 401(c)(1) (relating to self-employed 
        individuals).
          (4) Employer.--An individual who owns the entire 
        interest in an unincorporated trade or business shall 
        be treated as his own employer. A partnership shall be 
        treated as the employer of each partner who is an 
        employee within the meaning of paragraph (3).
          (5) Attribution rules.--
                  (A) Ownership of stock.--Ownership of stock 
                in a corporation shall be determined in 
                accordance with the rules provided under 
                subsections (d) and (e) of section 1563 
                (without regard to section 1563(e)(3)(C)).
                  (B) Interest in unincorporated trade or 
                business.--The interest of an employee in a 
                trade or business which is not incorporated 
                shall be determined in accordance with 
                regulations prescribed by the Secretary, which 
                shall be based on principles similar to the 
                principles which apply in the case of 
                subparagraph (A).
          (6) Utilization test not applicable.--A dependent 
        care assistance program shall not be held or considered 
        to fail to meet any requirements of subsection (d) 
        (other than paragraphs (4) and (8) thereof) merely 
        because of utilization rates for the different types of 
        assistance made available under the program.
          (7) Disallowance of excluded amounts as credit or 
        deduction.--No deduction or credit shall be allowed to 
        the employee under any other section of this chapter 
        for any amount excluded from the gross income of the 
        employee by reason of this section.
          (8) Treatment of onsite facilities.--In the case of 
        an onsite facility maintained by an employer, except to 
        the extent provided in regulations, the amount of 
        dependent care assistance provided to an employee 
        excluded with respect to any dependent shall be based 
        on--
                  (A) utilization of the facility by a 
                dependent of the employee, and
                  (B) the value of the services provided with 
                respect to such dependent.
          (9) Identifying information required with respect to 
        service provider.--No amount paid or incurred by an 
        employer for dependent care assistance provided to an 
        employee shall be excluded from the gross income of 
        such employee unless--
                  (A) the name, address, and taxpayer 
                identification number of the person performing 
                the services are included on the return to 
                which the exclusion relates, or
                  (B) if such person is an organization 
                described in section 501(c)(3) and exempt from 
                tax under section 501(a), the name and address 
                of such person are included on the return to 
                which the exclusion relates.
        In the case of a failure to provide the information 
        required under the preceding sentence, the preceding 
        sentence shall not apply if it is shown that the 
        taxpayer exercised due diligence in attempting to 
        provide the information so required.

           *       *       *       *       *       *       *


SEC. 132. CERTAIN FRINGE BENEFITS.

  (a) Exclusion from gross income.--Gross income shall not 
include any fringe benefit which qualifies as a--
          (1) no-additional-cost service,
          (2) qualified employee discount,
          (3) working condition fringe,
          (4) de minimis fringe,
          (5) qualified transportation fringe,
          (6) qualified moving expense reimbursement,
          (7) qualified retirement planning services, or
          (8) qualified military base realignment and closure 
        fringe.
  (b) No-additional-cost service defined.--For purposes of this 
section, the term ``no-additional-cost service'' means any 
service provided by an employer to an employee for use by such 
employee if--
          (1) such service is offered for sale to customers in 
        the ordinary course of the line of business of the 
        employer in which the employee is performing services, 
        and
          (2) the employer incurs no substantial additional 
        cost (including forgone revenue) in providing such 
        service to the employee (determined without regard to 
        any amount paid by the employee for such service).
  (c) Qualified employee discount defined.--For purposes of 
this section--
          (1) Qualified employee discount.--The term 
        ``qualified employee discount'' means any employee 
        discount with respect to qualified property or services 
        to the extent such discount does not exceed--
                  (A) in the case of property, the gross profit 
                percentage of the price at which the property 
                is being offered by the employer to customers, 
                or
                  (B) in the case of services, 20 percent of 
                the price at which the services are being 
                offered by the employer to customers.
          (2) Gross profit percentage.--
                  (A) In general.--The term ``gross profit 
                percentage'' means the percent which--
                          (i) the excess of the aggregate sales 
                        price of property sold by the employer 
                        to customers over the aggregate cost of 
                        such property to the employer, is of
                          (ii) the aggregate sale price of such 
                        property.
                  (B) Determination of gross profit 
                percentage.--Gross profit percentage shall be 
                determined on the basis of--
                          (i) all property offered to customers 
                        in the ordinary course of the line of 
                        business of the employer in which the 
                        employee is performing services (or a 
                        reasonable classification of property 
                        selected by the employer), and
                          (ii) the employer's experience during 
                        a representative period.
          (3) Employee discount defined.--The term ``employee 
        discount'' means the amount by which--
                  (A) the price at which the property or 
                services are provided by the employer to an 
                employee for use by such employee, is less than
                  (B) the price at which such property or 
                services are being offered by the employer to 
                customers.
          (4) Qualified property or services.--The term 
        ``qualified property or services'' means any property 
        (other than real property and other than personal 
        property of a kind held for investment) or services 
        which are offered for sale to customers in the ordinary 
        course of the line of business of the employer in which 
        the employee is performing services.
  (d) Working condition fringe defined.--For purposes of this 
section, the term ``working condition fringe'' means any 
property or services provided to an employee of the employer to 
the extent that, if the employee paid for such property or 
services, such payment would be allowable as a deduction under 
section 162 or 167.
  (e) De minimis fringe defined.--For purposes of this 
section--
          (1) In general.--The term ``de minimis fringe'' means 
        any property or service the value of which is (after 
        taking into account the frequency with which similar 
        fringes are provided by the employer to the employer's 
        employees) so small as to make accounting for it 
        unreasonable or administratively impracticable.
          (2) Treatment of certain eating facilities.--The 
        operation by an employer of any eating facility for 
        employees shall be treated as a de minimis fringe if--
                  (A) such facility is located on or near the 
                business premises of the employer, and
                  (B) revenue derived from such facility 
                normally equals or exceeds the direct operating 
                costs of such facility.
        The preceding sentence shall apply with respect to any 
        highly compensated employee only if access to the 
        facility is available on substantially the same terms 
        to each member of a group of employees which is defined 
        under a reasonable classification set up by the 
        employer which does not discriminate in favor of highly 
        compensated employees. For purposes of subparagraph 
        (B), an employee entitled under section 119 to exclude 
        the value of a meal provided at such facility shall be 
        treated as having paid an amount for such meal equal to 
        the direct operating costs of the facility attributable 
        to such meal.
  (f) Qualified transportation fringe.--
          (1) In general.--For purposes of this section, the 
        term ``qualified transportation fringe'' means any of 
        the following provided by an employer to an employee:
                  (A) Transportation in a commuter highway 
                vehicle if such transportation is in connection 
                with travel between the employee's residence 
                and place of employment.
                  (B) Any transit pass.
                  (C) Qualified parking.
                  (D) Any qualified bicycle commuting 
                reimbursement.
          (2) Limitation on exclusion.--The amount of the 
        fringe benefits which are provided by an employer to 
        any employee and which may be excluded from gross 
        income under subsection (a)(5) shall not exceed--
                  (A) $175 per month in the case of the 
                aggregate of the benefits described in 
                subparagraphs (A) and (B) of paragraph (1),
                  (B) $175 per month in the case of qualified 
                parking, and
                  (C) the applicable annual limitation in the 
                case of any qualified bicycle commuting 
                reimbursement.
          (3) Cash reimbursements.--For purposes of this 
        subsection, the term ``qualified transportation 
        fringe'' includes a cash reimbursement by an employer 
        to an employee for a benefit described in paragraph 
        (1). The preceding sentence shall apply to a cash 
        reimbursement for any transit pass only if a voucher or 
        similar item which may be exchanged only for a transit 
        pass is not readily available for direct distribution 
        by the employer to the employee.
          (4) No constructive receipt.--No amount shall be 
        included in the gross income of an employee solely 
        because the employee may choose between any qualified 
        transportation fringe (other than a qualified bicycle 
        commuting reimbursement) and compensation which would 
        otherwise be includible in gross income of such 
        employee.
          (5) Definitions.--For purposes of this subsection--
                  (A) Transit pass.--The term ``transit pass'' 
                means any pass, token, farecard, voucher, or 
                similar item entitling a person to 
                transportation (or transportation at a reduced 
                price) if such transportation is--
                          (i) on mass transit facilities 
                        (whether or not publicly owned), or
                          (ii) provided by any person in the 
                        business of transporting persons for 
                        compensation or hire if such 
                        transportation is provided in a vehicle 
                        meeting the requirements of 
                        subparagraph (B)(i).
                  (B) Commuter highway vehicle.--The term 
                ``commuter highway vehicle'' means any highway 
                vehicle--
                          (i) the seating capacity of which is 
                        at least 6 adults (not including the 
                        driver), and
                          (ii) at least 80 percent of the 
                        mileage use of which can reasonably be 
                        expected to be--
                                  (I) for purposes of 
                                transporting employees in 
                                connection with travel between 
                                their residences and their 
                                place of employment, and
                                  (II) on trips during which 
                                the number of employees 
                                transported for such purposes 
                                is at least 1/2 of the adult 
                                seating capacity of such 
                                vehicle (not including the 
                                driver).
                  (C) Qualified parking.--The term ``qualified 
                parking'' means parking provided to an employee 
                on or near the business premises of the 
                employer or on or near a location from which 
                the employee commutes to work by transportation 
                described in subparagraph (A), in a commuter 
                highway vehicle, or by carpool. Such term shall 
                not include any parking on or near property 
                used by the employee for residential purposes.
                  (D) Transportation provided by employer.--
                Transportation referred to in paragraph (1)(A) 
                shall be considered to be provided by an 
                employer if such transportation is furnished in 
                a commuter highway vehicle operated by or for 
                the employer.
                  (E) Employee.--For purposes of this 
                subsection, the term ``employee'' does not 
                include an individual who is an employee within 
                the meaning of section 401(c)(1).
                  (F) Definitions related to bicycle commuting 
                reimbursement.--
                          (i) Qualified bicycle commuting 
                        reimbursement.--The term ``qualified 
                        bicycle commuting reimbursement'' 
                        means, with respect to any calendar 
                        year, any employer reimbursement during 
                        the 15-month period beginning with the 
                        first day of such calendar year for 
                        reasonable expenses incurred by the 
                        employee during such calendar year for 
                        the purchase of a bicycle and bicycle 
                        improvements, repair, and storage, if 
                        such bicycle is regularly used for 
                        travel between the employee's residence 
                        and place of employment.
                          (ii) Applicable annual limitation.--
                        The term ``applicable annual 
                        limitation'' means, with respect to any 
                        employee for any calendar year, the 
                        product of $20 multiplied by the number 
                        of qualified bicycle commuting months 
                        during such year.
                          (iii) Qualified bicycle commuting 
                        month.--The term ``qualified bicycle 
                        commuting month'' means, with respect 
                        to any employee, any month during which 
                        such employee--
                                  (I) regularly uses the 
                                bicycle for a substantial 
                                portion of the travel between 
                                the employee's residence and 
                                place of employment, and
                                  (II) does not receive any 
                                benefit described in 
                                subparagraph (A), (B), or (C) 
                                of paragraph (1).
          (6) Inflation adjustment.--
                  (A) In general.--In the case of any taxable 
                year beginning in a calendar year after 1999, 
                the dollar amounts contained in subparagraphs 
                (A) and (B) of paragraph (2) shall be increased 
                by an amount equal to--
                          (i) such dollar amount, multiplied by
                          (ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for 
                        the calendar year in which the taxable 
                        year begins, by substituting ``calendar 
                        year 1998'' for ``calendar year 2016'' 
                        in subparagraph (A)(ii) thereof.
                  (B) Rounding.--If any increase determined 
                under subparagraph (A) is not a multiple of $5, 
                such increase shall be rounded to the next 
                lowest multiple of $5.
          (7) Coordination with other provisions.--For purposes 
        of this section, the terms ``working condition fringe'' 
        and ``de minimis fringe'' shall not include any 
        qualified transportation fringe (determined without 
        regard to paragraph (2)).
          (8) Suspension of qualified bicycle commuting 
        reimbursement exclusion.--Paragraph (1)(D) shall not 
        apply to any taxable year beginning after December 31, 
        2017, and before January 1, 2026.
  (g) Qualified moving expense reimbursement.--For purposes of 
this section--
          (1) In general.--The term ``qualified moving expense 
        reimbursement'' means any amount received (directly or 
        indirectly) by an individual from an employer as a 
        payment for (or a reimbursement of) expenses which 
        would be deductible as moving expenses under section 
        217 if directly paid or incurred by the individual. 
        Such term shall not include any payment for (or 
        reimbursement of) an expense actually deducted by the 
        individual in a prior taxable year.
          (2) Suspension for taxable years 2018 through 2025.--
        Except in the case of a member of the Armed Forces of 
        the United States on active duty who moves pursuant to 
        a military order and incident to a permanent change of 
        station, subsection (a)(6) shall not apply to any 
        taxable year beginning after December 31, 2017, and 
        before January 1, 2026.
  (h) Certain individuals treated as employees for purposes of 
subsections (a)(1) and (2).--For purposes of paragraphs (1) and 
(2) of subsection (a)--
          (1) Retired and disabled employees and surviving 
        spouse of employee treated as employee.--With respect 
        to a line of business of an employer, the term 
        ``employee'' includes--
                  (A) any individual who was formerly employed 
                by such employer in such line of business and 
                who separated from service with such employer 
                in such line of business by reason of 
                retirement or disability, and
                  (B) any widow or widower of any individual 
                who died while employed by such employer in 
                such line of business or while an employee 
                within the meaning of subparagraph (A).
          (2) Spouse and dependent children.--
                  (A) In general.--Any use by the spouse or a 
                dependent child of the employee shall be 
                treated as use by the employee.
                  (B) Dependent child.--For purposes of 
                subparagraph (A), the term ``dependent child'' 
                means any child (as defined in section 
                152(f)(1)) of the employee--
                          (i) who is a dependent of the 
                        employee, or
                          (ii) both of whose parents are 
                        deceased and who has not attained age 
                        25.
                For purposes of the preceding sentence, any 
                child to whom section 152(e) applies shall be 
                treated as the dependent of both parents.
          (3) Special rule for parents in the case of air 
        transportation.--Any use of air transportation by a 
        parent of an employee (determined without regard to 
        paragraph (1)(B)) shall be treated as use by the 
        employee.
  (i) Reciprocal agreements.--For purposes of paragraph (1) of 
subsection (a), any service provided by an employer to an 
employee of another employer shall be treated as provided by 
the employer of such employee if--
          (1) such service is provided pursuant to a written 
        agreement between such employers, and
          (2) neither of such employers incurs any substantial 
        additional costs (including foregone revenue) in 
        providing such service or pursuant to such agreement.
  (j) Special rules.--
          (1) Exclusions under subsection (a)(1) and (2) apply 
        to highly compensated employees only if no 
        discrimination.--Paragraphs (1) and (2) of subsection 
        (a) shall apply with respect to any fringe benefit 
        described therein provided with respect to any highly 
        compensated employee only if such fringe benefit is 
        available on substantially the same terms to each 
        member of a group of employees which is defined under a 
        reasonable classification set up by the employer which 
        does not discriminate in favor of highly compensated 
        employees.
          (2) Special rule for leased sections of department 
        stores.--
                  (A) In general.--For purposes of paragraph 
                (2) of subsection (a), in the case of a leased 
                section of a department store--
                          (i) such section shall be treated as 
                        part of the line of business of the 
                        person operating the department store, 
                        and
                          (ii) employees in the leased section 
                        shall be treated as employees of the 
                        person operating the department store.
                  (B) Leased section of department store.--For 
                purposes of subparagraph (A), a leased section 
                of a department store is any part of a 
                department store where over-the-counter sales 
                of property are made under a lease or similar 
                arrangement where it appears to the general 
                public that individuals making such sales are 
                employed by the person operating the department 
                store.
          (3) Auto salesmen.--
                  (A) In general.--For purposes of subsection 
                (a)(3), qualified automobile demonstration use 
                shall be treated as a working condition fringe.
                  (B) Qualified automobile demonstration use.--
                For purposes of subparagraph (A), the term 
                ``qualified automobile demonstration use'' 
                means any use of an automobile by a full-time 
                automobile salesman in the sales area in which 
                the automobile dealer's sales office is located 
                if--
                          (i) such use is provided primarily to 
                        facilitate the salesman's performance 
                        of services for the employer, and
                          (ii) there are substantial 
                        restrictions on the personal use of 
                        such automobile by such salesman.
          (4) On-premises gyms and other athletic facilities.--
                  (A) In general.--Gross income shall not 
                include the value of any on-premises athletic 
                facility provided by an employer to his 
                employees.
                  (B) On-premises athletic facility.--For 
                purposes of this paragraph, the term ``on-
                premises athletic facility'' means any gym or 
                other athletic facility--
                          (i) which is located on the premises 
                        of the employer,
                          (ii) which is operated by the 
                        employer, and
                          (iii) substantially all the use of 
                        which is by employees of the employer, 
                        their spouses, and their dependent 
                        children (within the meaning of 
                        subsection (h)).
          (5) Special rule for affiliates of airlines.--
                  (A) In general.--If--
                          (i) a qualified affiliate is a member 
                        of an affiliated group another member 
                        of which operates an airline, and
                          (ii) employees of the qualified 
                        affiliate who are directly engaged in 
                        providing airline-related services are 
                        entitled to no-additional-cost service 
                        with respect to air transportation 
                        provided by such other member,
                then, for purposes of applying paragraph (1) of 
                subsection (a) to such no-additional-cost 
                service provided to such employees, such 
                qualified affiliate shall be treated as engaged 
                in the same line of business as such other 
                member.
                  (B) Qualified affiliate.--For purposes of 
                this paragraph, the term ``qualified 
                affiliate'' means any corporation which is 
                predominantly engaged in airline-related 
                services.
                  (C) Airline-related services.--For purposes 
                of this paragraph, the term ``airline-related 
                services'' means any of the following services 
                provided in connection with air transportation:
                          (i) Catering.
                          (ii) Baggage handling.
                          (iii) Ticketing and reservations.
                          (iv) Flight planning and weather 
                        analysis.
                          (v) Restaurants and gift shops 
                        located at an airport.
                          (vi) Such other similar services 
                        provided to the airline as the 
                        Secretary may prescribe.
                  (D) Affiliated group.--For purposes of this 
                paragraph, the term ``affiliated group'' has 
                the meaning given such term by section 1504(a).
          (6) Highly compensated employee.--For purposes of 
        this section, the term ``highly compensated employee'' 
        has the meaning given such term by section 414(q).
          (7) Air cargo.--For purposes of subsection (b), the 
        transportation of cargo by air and the transportation 
        of passengers by air shall be treated as the same 
        service.
          (8) Application of section to otherwise taxable 
        educational or training benefits.--Amounts paid or 
        expenses incurred by the employer for education or 
        training provided to the employee which are not 
        excludable from gross income under section 127 shall be 
        excluded from gross income under this section if (and 
        only if) such amounts or expenses are a working 
        condition fringe.
  (k) Customers not to include employees.--For purposes of this 
section (other than subsection (c)(2)), the term ``customers'' 
shall only include customers who are not employees.
  (l) Section not to apply to fringe benefits expressly 
provided for elsewhere.--This section (other than subsections 
(e) and (g)) shall not apply to any fringe benefits of a type 
the tax treatment of which is expressly provided for in any 
other section of this chapter.
  (m) Qualified retirement planning services.--
          (1) In general.--For purposes of this section, the 
        term ``qualified retirement planning services'' means 
        any retirement planning advice or information provided 
        to an employee and [his spouse] the employee's spouse 
        by an employer maintaining a qualified employer plan.
          (2) Nondiscrimination rule.--Subsection (a)(7) shall 
        apply in the case of highly compensated employees only 
        if such services are available on substantially the 
        same terms to each member of the group of employees 
        normally provided education and information regarding 
        the employer's qualified employer plan.
          (3) Qualified employer plan.--For purposes of this 
        subsection, the term ``qualified employer plan'' means 
        a plan, contract, pension, or account described in 
        section 219(g)(5).
  (n) Qualified military base realignment and closure fringe.--
For purposes of this section--
          (1) In general.--The term ``qualified military base 
        realignment and closure fringe'' means 1 or more 
        payments under the authority of section 1013 of the 
        Demonstration Cities and Metropolitan Development Act 
        of 1966 (42 U.S.C. 3374) (as in effect on the date of 
        the enactment of the American Recovery and Reinvestment 
        Tax Act of 2009).
          (2) Limitation.--With respect to any property, such 
        term shall not include any payment referred to in 
        paragraph (1) to the extent that the sum of all of such 
        payments related to such property exceeds the maximum 
        amount described in subsection (c) of such section (as 
        in effect on such date).
  (o) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary or appropriate to carry out the 
purposes of this section.

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SEC. 135. INCOME FROM UNITED STATES SAVINGS BONDS USED TO PAY HIGHER 
                    EDUCATION TUITION AND FEES.

  (a) General rule.--In the case of an individual who pays 
qualified higher education expenses during the taxable year, no 
amount shall be includible in gross income by reason of the 
redemption during such year of any qualified United States 
savings bond.
  (b) Limitations.--
          (1) Limitation where redemption proceeds exceed 
        higher education expenses.--
                  (A) In general.--If--
                          (i) the aggregate proceeds of 
                        qualified United States savings bonds 
                        redeemed by the taxpayer during the 
                        taxable year exceed
                          (ii) the qualified higher education 
                        expenses paid by the taxpayer during 
                        such taxable year,
                the amount excludable from gross income under 
                subsection (a) shall not exceed the applicable 
                fraction of the amount excludable from gross 
                income under subsection (a) without regard to 
                this subsection.
                  (B) Applicable fraction.--For purposes of 
                subparagraph (A), the term ``applicable 
                fraction'' means the fraction the numerator of 
                which is the amount described in subparagraph 
                (A)(ii) and the denominator of which is the 
                amount described in subparagraph (A)(i).
          (2) Limitation based on modified adjusted gross 
        income.--
                  (A) In general.--If the modified adjusted 
                gross income of the taxpayer for the taxable 
                year exceeds $40,000 ($60,000 in the case of a 
                joint return), the amount which would (but for 
                this paragraph) be excludable from gross income 
                under subsection (a) shall be reduced (but not 
                below zero) by the amount which bears the same 
                ratio to the amount which would be so 
                excludable as such excess bears to $15,000 
                ($30,000 in the case of a joint return).
                  (B) Inflation adjustment.--In the case of any 
                taxable year beginning in a calendar year after 
                1990, the $40,000 and $60,000 amounts contained 
                in subparagraph (A) shall be increased by an 
                amount equal to--
                          (i) such dollar amount, multiplied by
                          (ii) the cost-of-living adjustment 
                        under section 1(f)(3) for the calendar 
                        year in which the taxable year begins, 
                        determined by substituting ``calendar 
                        year 1989'' for ``calendar year 2016'' 
                        in subparagraph (A)(ii) thereof.
                  (C) Rounding.--If any amount as adjusted 
                under subparagraph (B) is not a multiple of 
                $50, such amount shall be rounded to the 
                nearest multiple of $50 (or if such amount is a 
                multiple of $25, such amount shall be rounded 
                to the next highest multiple of $50).
  (c) Definitions.--For purposes of this section--
          (1) Qualified United States savings bond.--The term 
        ``qualified United States savings bond'' means any 
        United States savings bond issued--
                  (A) after December 31, 1989,
                  (B) to an individual who has attained age 24 
                before the date of issuance, and
                  (C) at discount under section 3105 of title 
                31, United States Code.
          (2) Qualified higher education expenses.--
                  (A) In general.--The term ``qualified higher 
                education expenses'' means tuition and fees 
                required for the enrollment or attendance of--
                          (i) the taxpayer,
                          (ii) the taxpayer's spouse, or
                          (iii) any dependent of the taxpayer 
                        with respect to whom the taxpayer is 
                        allowed a deduction under section 151,
                at an eligible educational institution.
                  (B) Exception for education involving sports, 
                etc..--Such term shall not include expenses 
                with respect to any course or other education 
                involving sports, games, or hobbies other than 
                as part of a degree program.
                  (C) Contributions to qualified tuition 
                program and Coverdell education savings 
                accounts.--Such term shall include any 
                contribution to a qualified tuition program (as 
                defined in section 529) on behalf of a 
                designated beneficiary (as defined in such 
                section), or to a Coverdell education savings 
                account (as defined in section 530) on behalf 
                of an account beneficiary, who is an individual 
                described in subparagraph (A); but there shall 
                be no increase in the investment in the 
                contract for purposes of applying section 72 by 
                reason of any portion of such contribution 
                which is not includible in gross income by 
                reason of this subparagraph.
          (3) Eligible educational institution.--The term 
        ``eligible educational institution'' has the meaning 
        given such term by section 529(e)(5).
          (4) Modified adjusted gross income.--The term 
        ``modified adjusted gross income'' means the adjusted 
        gross income of the taxpayer for the taxable year 
        determined--
                  (A) without regard to this section and 
                sections 137, 221, 222, 911, 931, and 933, and
                  (B) after the application of sections 86, 
                469, and 219.
  (d) Special rules.--
          (1) Adjustment for certain scholarships and veterans 
        benefits.--The amount of qualified higher education 
        expenses otherwise taken into account under subsection 
        (a) with respect to the education of an individual 
        shall be reduced (before the application of subsection 
        (b)) by the sum of the amounts received with respect to 
        such individual for the taxable year as--
                  (A) a qualified scholarship which under 
                section 117 is not includable in gross income,
                  (B) an educational assistance allowance under 
                chapter 30, 31, 32, 34, or 35 of title 38, 
                United States Code,
                  (C) a payment (other than a gift, bequest, 
                devise, or inheritance within the meaning of 
                section 102(a)) for educational expenses, or 
                attributable to attendance at an eligible 
                educational institution, which is exempt from 
                income taxation by any law of the United 
                States, or
                  (D) a payment, waiver, or reimbursement of 
                qualified higher education expenses under a 
                qualified tuition program (within the meaning 
                of section 529(b)).
          (2) Coordination with other higher education 
        benefits.--The amount of the qualified higher education 
        expenses otherwise taken into account under subsection 
        (a) with respect to the education of an individual 
        shall be reduced (before the application of subsection 
        (b)) by--
                  (A) the amount of such expenses which are 
                taken into account in determining the credit 
                allowed to the taxpayer or any other person 
                under section 25A with respect to such 
                expenses; and
                  (B) the amount of such expenses which are 
                taken into account in determining the 
                exclusions under sections 529(c)(3)(B) and 
                530(d)(2).
          (3) No exclusion for married individuals filing 
        separate returns.--If the taxpayer is a married 
        individual (within the meaning of section 7703), this 
        section shall apply only if the taxpayer and [his 
        spouse] the taxpayer's spouse file a joint return for 
        the taxable year.
          (4) Regulations.--The Secretary may prescribe such 
        regulations as may be necessary or appropriate to carry 
        out this section, including regulations requiring 
        record keeping and information reporting.

           *       *       *       *       *       *       *


PART V--DEDUCTIONS FOR PERSONAL EXEMPTIONS

           *       *       *       *       *       *       *


SEC. 151. ALLOWANCE OF DEDUCTIONS FOR PERSONAL EXEMPTIONS.

  (a) Allowance of deductions.--In the case of an individual, 
the exemptions provided by this section shall be allowed as 
deductions in computing taxable income.
  (b) Taxpayer and spouse.--An exemption of the exemption 
amount for the taxpayer; and an additional exemption of the 
exemption amount for the spouse of the taxpayer if a joint 
return is not made by the taxpayer and [his spouse] the 
taxpayer's spouse , and if the spouse, for the calendar year in 
which the taxable year of the taxpayer begins, has no gross 
income and is not the dependent of another taxpayer.
  (c) Additional exemption for dependents.--An exemption of the 
exemption amount for each individual who is a dependent (as 
defined in section 152) of the taxpayer for the taxable year.
  (d) Exemption amount.--For purposes of this section--
          (1) In general.--Except as otherwise provided in this 
        subsection, the term ``exemption amount'' means $2,000.
          (2) Exemption amount disallowed in case of certain 
        dependents.--In the case of an individual with respect 
        to whom a deduction under this section is allowable to 
        another taxpayer for a taxable year beginning in the 
        calendar year in which the individual's taxable year 
        begins, the exemption amount applicable to such 
        individual for such individual's taxable year shall be 
        zero.
          (3) Phaseout.--
                  (A) In general.--In the case of any taxpayer 
                whose adjusted gross income for the taxable 
                year exceeds the applicable amount in effect 
                under section 68(b), the exemption amount shall 
                be reduced by the applicable percentage.
                  (B) Applicable percentage.--For purposes of 
                subparagraph (A), the term ``applicable 
                percentage'' means 2 percentage points for each 
                $2,500 (or fraction thereof) by which the 
                taxpayer's adjusted gross income for the 
                taxable year exceeds the applicable amount in 
                effect under section 68(b). In the case of a 
                married individual filing a separate return, 
                the preceding sentence shall be applied by 
                substituting ``$1,250'' for ``$2,500''. In no 
                event shall the applicable percentage exceed 
                100 percent.
                  (C) Coordination with other provisions.--The 
                provisions of this paragraph shall not apply 
                for purposes of determining whether a deduction 
                under this section with respect to any 
                individual is allowable to another taxpayer for 
                any taxable year.
          (4) Inflation adjustment.--Except as provided in 
        paragraph (5), in the case of any taxable year 
        beginning in a calendar year after 1989, the dollar 
        amount contained in paragraph (1) shall be increased by 
        an amount equal to--
                  (A) such dollar amount, multiplied by
                  (B) the cost-of-living adjustment determined 
                under section 1(f)(3) for the calendar year in 
                which the taxable year begins, by substituting 
                ``calendar year 1988'' for ``calendar year 
                2016'' in subparagraph (A)(ii) thereof.
          (5) Special rules for taxable years 2018 through 
        2025.--In the case of a taxable year beginning after 
        December 31, 2017, and before January 1, 2026--
                  (A) Exemption amount.--The term ``exemption 
                amount'' means zero.
                  (B) References.--For purposes of any other 
                provision of this title, the reduction of the 
                exemption amount to zero under subparagraph (A) 
                shall not be taken into account in determining 
                whether a deduction is allowed or allowable, or 
                whether a taxpayer is entitled to a deduction, 
                under this section.
  (e) Identifying information required.--No exemption shall be 
allowed under this section with respect to any individual 
unless the TIN of such individual is included on the return 
claiming the exemption.

           *       *       *       *       *       *       *


PART VI--ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS

           *       *       *       *       *       *       *


SEC. 165. LOSSES.

  (a) General rule.--There shall be allowed as a deduction any 
loss sustained during the taxable year and not compensated for 
by insurance or otherwise.
  (b) Amount of deduction.--For purposes of subsection (a), the 
basis for determining the amount of the deduction for any loss 
shall be the adjusted basis provided in section 1011 for 
determining the loss from the sale or other disposition of 
property.
  (c) Limitation on losses of individuals.--In the case of an 
individual, the deduction under subsection (a) shall be limited 
to--
          (1) losses incurred in a trade or business;
          (2) losses incurred in any transaction entered into 
        for profit, though not connected with a trade or 
        business; and
          (3) except as provided in subsection (h), losses of 
        property not connected with a trade or business or a 
        transaction entered into for profit, if such losses 
        arise from fire, storm, shipwreck, or other casualty, 
        or from theft.
  (d) Wagering losses.--Losses from wagering transactions shall 
be allowed only to the extent of the gains from such 
transactions. For purposes of the preceding sentence, in the 
case of taxable years beginning after December 31, 2017, and 
before January 1, 2026, the term ``losses from wagering 
transactions'' includes any deduction otherwise allowable under 
this chapter incurred in carrying on any wagering transaction.
  (e) Theft losses.--For purposes of subsection (a), any loss 
arising from theft shall be treated as sustained during the 
taxable year in which the taxpayer discovers such loss.
  (f) Capital losses.--Losses from sales or exchanges of 
capital assets shall be allowed only to the extent allowed in 
sections 1211 and 1212.
  (g) Worthless securities.--
          (1) General rule.--If any security which is a capital 
        asset becomes worthless during the taxable year, the 
        loss resulting therefrom shall, for purposes of this 
        subtitle, be treated as a loss from the sale or 
        exchange, on the last day of the taxable year, of a 
        capital asset.
          (2) Security defined.--For purposes of this 
        subsection, the term ``security'' means--
                  (A) a share of stock in a corporation;
                  (B) a right to subscribe for, or to receive, 
                a share of stock in a corporation; or
                  (C) a bond, debenture, note, or certificate, 
                or other evidence of indebtedness, issued by a 
                corporation or by a government or political 
                subdivision thereof, with interest coupons or 
                in registered form.
          (3) Securities in affiliated corporation.--For 
        purposes of paragraph (1), any security in a 
        corporation affiliated with a taxpayer which is a 
        domestic corporation shall not be treated as a capital 
        asset. For purposes of the preceding sentence, a 
        corporation shall be treated as affiliated with the 
        taxpayer only if--
                  (A) the taxpayer owns directly stock in such 
                corporation meeting the requirements of section 
                1504(a)(2), and
                  (B) more than 90 percent of the aggregate of 
                its gross receipts for all taxable years has 
                been from sources other than royalties, rents 
                (except rents derived from rental of properties 
                to employees of the corporation in the ordinary 
                course of its operating business), dividends, 
                interest (except interest received on deferred 
                purchase price of operating assets sold), 
                annuities, and gains from sales or exchanges of 
                stocks and securities.
        In computing gross receipts for purposes of the 
        preceding sentence, gross receipts from sales or 
        exchanges of stocks and securities shall be taken into 
        account only to the extent of gains therefrom.
  (h) Treatment of casualty gains and losses.--
          (1) Dollar limitation per casualty.--Any loss of an 
        individual described in subsection (c)(3) shall be 
        allowed only to the extent that the amount of the loss 
        to such individual arising from each casualty, or from 
        each theft, exceeds $500 ($100 for taxable years 
        beginning after December 31, 2009).
          (2) Net casualty loss allowed only to the extent it 
        exceeds 10 percent of adjusted gross income.--
                  (A) In general.--If the personal casualty 
                losses for any taxable year exceed the personal 
                casualty gains for such taxable year, such 
                losses shall be allowed for the taxable year 
                only to the extent of the sum of--
                          (i) the amount of the personal 
                        casualty gains for the taxable year, 
                        plus
                          (ii) so much of such excess as 
                        exceeds 10 percent of the adjusted 
                        gross income of the individual.
                  (B) Special rule where personal casualty 
                gains exceed personal casualty losses.--If the 
                personal casualty gains for any taxable year 
                exceed the personal casualty losses for such 
                taxable year--
                          (i) all such gains shall be treated 
                        as gains from sales or exchanges of 
                        capital assets, and
                          (ii) all such losses shall be treated 
                        as losses from sales or exchanges of 
                        capital assets.
          (3) Definitions of personal casualty gain and 
        personal casualty loss.--For purposes of this 
        subsection--
                  (A) Personal casualty gain.--The term 
                ``personal casualty gain'' means the recognized 
                gain from any involuntary conversion of 
                property which is described in subsection 
                (c)(3) arising from fire, storm, shipwreck, or 
                other casualty, or from theft.
                  (B) Personal casualty loss.--The term 
                ``personal casualty loss'' means any loss 
                described in subsection (c)(3). For purposes of 
                paragraph (2), the amount of any personal 
                casualty loss shall be determined after the 
                application of paragraph (1).
          (4) Special rules.--
                  (A) Personal casualty losses allowable in 
                computing adjusted gross income to the extent 
                of personal casualty gains.--In any case to 
                which paragraph (2)(A) applies, the deduction 
                for personal casualty losses for any taxable 
                year shall be treated as a deduction allowable 
                in computing adjusted gross income to the 
                extent such losses do not exceed the personal 
                casualty gains for the taxable year.
                  (B) Joint returns.--For purposes of this 
                subsection, a [husband and wife] married couple 
                making a joint return for the taxable year 
                shall be treated as 1 individual.
                  (C) Determination of adjusted gross income in 
                case of estates and trusts.--For purposes of 
                paragraph (2), the adjusted gross income of an 
                estate or trust shall be computed in the same 
                manner as in the case of an individual, except 
                that the deductions for costs paid or incurred 
                in connection with the administration of the 
                estate or trust shall be treated as allowable 
                in arriving at adjusted gross income.
                  (D) Coordination with estate tax.--No loss 
                described in subsection (c)(3) shall be allowed 
                if, at the time of filing the return, such loss 
                has been claimed for estate tax purposes in the 
                estate tax return.
                  (E) Claim required to be filed in certain 
                cases.--Any loss of an individual described in 
                subsection (c)(3) to the extent covered by 
                insurance shall be taken into account under 
                this section only if the individual files a 
                timely insurance claim with respect to such 
                loss.
          (5) Limitation for taxable years 2018 through 2025.--
                  (A) In general.--In the case of an 
                individual, except as provided in subparagraph 
                (B), any personal casualty loss which (but for 
                this paragraph) would be deductible in a 
                taxable year beginning after December 31, 2017, 
                and before January 1, 2026, shall be allowed as 
                a deduction under subsection (a) only to the 
                extent it is attributable to a Federally 
                declared disaster (as defined in subsection 
                (i)(5)).
                  (B) Exception related to personal casualty 
                gains.--If a taxpayer has personal casualty 
                gains for any taxable year to which 
                subparagraph (A) applies--
                          (i) subparagraph (A) shall not apply 
                        to the portion of the personal casualty 
                        loss not attributable to a Federally 
                        declared disaster (as so defined) to 
                        the extent such loss does not exceed 
                        such gains, and
                          (ii) in applying paragraph (2) for 
                        purposes of subparagraph (A) to the 
                        portion of personal casualty loss which 
                        is so attributable to such a disaster, 
                        the amount of personal casualty gains 
                        taken into account under paragraph 
                        (2)(A) shall be reduced by the portion 
                        of such gains taken into account under 
                        clause (i).
  (i) Disaster losses.--
          (1) Election to take deduction for preceding year.--
        Notwithstanding the provisions of subsection (a), any 
        loss occurring in a disaster area and attributable to a 
        federally declared disaster may, at the election of the 
        taxpayer, be taken into account for the taxable year 
        immediately preceding the taxable year in which the 
        disaster occurred.
          (2) Year of loss.--If an election is made under this 
        subsection, the casualty resulting in the loss shall be 
        treated for purposes of this title as having occurred 
        in the taxable year for which the deduction is claimed.
          (3) Amount of loss.--The amount of the loss taken 
        into account in the preceding taxable year by reason of 
        paragraph (1) shall not exceed the uncompensated amount 
        determined on the basis of the facts existing at the 
        date the taxpayer claims the loss.
          (4) Use of disaster loan appraisals to establish 
        amount of loss.--Nothing in this title shall be 
        construed to prohibit the Secretary from prescribing 
        regulations or other guidance under which an appraisal 
        for the purpose of obtaining a loan of Federal funds or 
        a loan guarantee from the Federal Government as a 
        result of a federally declared disaster may be used to 
        establish the amount of any loss described in paragraph 
        (1) or (2).
          (5) Federally declared disasters.--For purposes of 
        this subsection--
                  (A) In general.--The term ``Federally 
                declared disaster'' means any disaster 
                subsequently determined by the President of the 
                United States to warrant assistance by the 
                Federal Government under the Robert T. Stafford 
                Disaster Relief and Emergency Assistance Act.
                  (B) Disaster area.--The term ``disaster 
                area'' means the area so determined to warrant 
                such assistance.
  (j) Denial of deduction for losses on certain obligations not 
in registered form.--
          (1) In general.--Nothing in subsection (a) or in any 
        other provision of law shall be construed to provide a 
        deduction for any loss sustained on any registration-
        required obligation unless such obligation is in 
        registered form (or the issuance of such obligation was 
        subject to tax under section 4701).
          (2) Definitions.--For purposes of this subsection--
                  (A) Registration-required obligation.--The 
                term ``registration-required obligation'' has 
                the meaning given to such term by section 
                163(f)(2).
                  (B) Registered form.--The term ``registered 
                form'' has the same meaning as when used in 
                section 163(f).
          (3) Exceptions.--The Secretary may, by regulations, 
        provide that this subsection and section 1287 shall not 
        apply with respect to obligations held by any person 
        if--
                  (A) such person holds such obligations in 
                connection with a trade or business outside the 
                United States,
                  (B) such person holds such obligations as a 
                broker dealer (registered under Federal or 
                State law) for sale to customers in the 
                ordinary course of his trade or business,
                  (C) such person complies with reporting 
                requirements with respect to ownership, 
                transfers, and payments as the Secretary may 
                require, or
                  (D) such person promptly surrenders the 
                obligation to the issuer for the issuance of a 
                new obligation in registered form,
        but only if such obligations are held under 
        arrangements provided in regulations or otherwise which 
        are designed to assure that such obligations are not 
        delivered to any United States person other than a 
        person described in subparagraph (A), (B), or (C).
  (k) Treatment as disaster loss where taxpayer ordered to 
demolish or relocate residence in disaster area because of 
disaster.--In the case of a taxpayer whose residence is located 
in an area which has been determined by the President of the 
United States to warrant assistance by the Federal Government 
under the Robert T. Stafford Disaster Relief and Emergency 
Assistance Act, if--
          (1) not later than the 120th day after the date of 
        such determination, the taxpayer is ordered, by the 
        government of the State or any political subdivision 
        thereof in which such residence is located, to demolish 
        or relocate such residence, and
          (2) the residence has been rendered unsafe for use as 
        a residence by reason of the disaster,
any loss attributable to such disaster shall be treated as a 
loss which arises from a casualty and which is described in 
subsection (i).
  (l) Treatment of certain losses in insolvent financial 
institutions.--
          (1) In general.--If--
                  (A) as of the close of the taxable year, it 
                can reasonably be estimated that there is a 
                loss on a qualified individual's deposit in a 
                qualified financial institution, and
                  (B) such loss is on account of the bankruptcy 
                or insolvency of such institution,
        then the taxpayer may elect to treat the amount so 
        estimated as a loss described in subsection (c)(3) 
        incurred during the taxable year.
          (2) Qualified individual defined.--For purposes of 
        this subsection, the term ``qualified individual'' 
        means any individual, except an individual--
                  (A) who owns at least 1 percent in value of 
                the outstanding stock of the qualified 
                financial institution,
                  (B) who is an officer of the qualified 
                financial institution,
                  (C) who is a sibling (whether by the whole or 
                half blood), spouse, aunt, uncle, nephew, 
                niece, ancestor, or lineal descendant of an 
                individual described in subparagraph (A) or 
                (B), or
                  (D) who otherwise is a related person (as 
                defined in section 267(b)) with respect to an 
                individual described in subparagraph (A) or 
                (B).
          (3) Qualified financial institution.--For purposes of 
        this subsection, the term ``qualified financial 
        institution'' means--
                  (A) any bank (as defined in section 581),
                  (B) any institution described in section 591,
                  (C) any credit union the deposits or accounts 
                in which are insured under Federal or State law 
                or are protected or guaranteed under State law, 
                or
                  (D) any similar institution chartered and 
                supervised under Federal or State law.
          (4) Deposit.--For purposes of this subsection, the 
        term ``deposit'' means any deposit, withdrawable 
        account, or withdrawable or repurchasable share.
          (5) Election to treat as ordinary loss.--
                  (A) In general.--In lieu of any election 
                under paragraph (1), the taxpayer may elect to 
                treat the amount referred to in paragraph (1) 
                for the taxable year as an ordinary loss 
                described in subsection (c)(2) incurred during 
                the taxable year.
                  (B) Limitations.--
                          (i) Deposit may not be federally 
                        insured.--No election may be made under 
                        subparagraph (A) with respect to any 
                        loss on a deposit in a qualified 
                        financial institution if part or all of 
                        such deposit is insured under Federal 
                        law.
                          (ii) Dollar limitation.--With respect 
                        to each financial institution, the 
                        aggregate amount of losses attributable 
                        to deposits in such financial 
                        institution to which an election under 
                        subparagraph (A) may be made by the 
                        taxpayer for any taxable year shall not 
                        exceed $20,000 ($10,000 in the case of 
                        a separate return by a married 
                        individual). The limitation of the 
                        preceding sentence shall be reduced by 
                        the amount of any insurance proceeds 
                        under any State law which can 
                        reasonably be expected to be received 
                        with respect to losses on deposits in 
                        such institution.
          (6) Election.--Any election by the taxpayer under 
        this subsection for any taxable year--
                  (A) shall apply to all losses for such 
                taxable year of the taxpayer on deposits in the 
                institution with respect to which such election 
                was made, and
                  (B) may be revoked only with the consent of 
                the Secretary.
          (7) Coordination with section 166.--Section 166 shall 
        not apply to any loss to which an election under this 
        subsection applies.
  (m) Cross references.--
                  (1) For special rule for banks with respect 
                to worthless securities, see section 582.
                  (2) For disallowance of deduction for 
                worthlessness of securities to which subsection 
                (g)(2)(C) applies, if issued by a political 
                party or similar organization, see section 271.
                  (3) For special rule for losses on stock in a 
                small business investment company, see section 
                1242.
                  (4) For special rule for losses of a small 
                business investment company, see section 1243.
                  (5) For special rule for losses on small 
                business stock, see section 1244.

           *       *       *       *       *       *       *


SEC. 170. CHARITABLE, ETC., CONTRIBUTIONS AND GIFTS.

  (a) Allowance of deduction.--
          (1) General rule.--There shall be allowed as a 
        deduction any charitable contribution (as defined in 
        subsection (c)) payment of which is made within the 
        taxable year. A charitable contribution shall be 
        allowable as a deduction only if verified under 
        regulations prescribed by the Secretary.
          (2) Corporations on accrual basis.--In the case of a 
        corporation reporting its taxable income on the accrual 
        basis, if--
                  (A) the board of directors authorizes a 
                charitable contribution during any taxable 
                year, and
                  (B) payment of such contribution is made 
                after the close of such taxable year and on or 
                before the 15th day of the fourth month 
                following the close of such taxable year,
        then the taxpayer may elect to treat such contribution 
        as paid during such taxable year. The election may be 
        made only at the time of the filing of the return for 
        such taxable year, and shall be signified in such 
        manner as the Secretary shall by regulations prescribe.
          (3) Future interests in tangible personal property.--
        For purposes of this section, payment of a charitable 
        contribution which consists of a future interest in 
        tangible personal property shall be treated as made 
        only when all intervening interests in, and rights to 
        the actual possession or enjoyment of, the property 
        have expired or are held by persons other than the 
        taxpayer or those standing in a relationship to the 
        taxpayer described in section 267(b) or 707(b). For 
        purposes of the preceding sentence, a fixture which is 
        intended to be severed from the real property shall be 
        treated as tangible personal property.
  (b) Percentage limitations.--
          (1) Individuals.--In the case of an individual, the 
        deduction provided in subsection (a) shall be limited 
        as provided in the succeeding subparagraphs.
                  (A) General rule.--Any charitable 
                contribution to--
                          (i) a church or a convention or 
                        association of churches,
                          (ii) an educational organization 
                        which normally maintains a regular 
                        faculty and curriculum and normally has 
                        a regularly enrolled body of pupils or 
                        students in attendance at the place 
                        where its educational activities are 
                        regularly carried on,
                          (iii) an organization the principal 
                        purpose or functions of which are the 
                        providing of medical or hospital care 
                        or medical education or medical 
                        research, if the organization is a 
                        hospital, or if the organization is a 
                        medical research organization directly 
                        engaged in the continuous active 
                        conduct of medical research in 
                        conjunction with a hospital, and during 
                        the calendar year in which the 
                        contribution is made such organization 
                        is committed to spend such 
                        contributions for such research before 
                        January 1 of the fifth calendar year 
                        which begins after the date such 
                        contribution is made,
                          (iv) an organization which normally 
                        receives a substantial part of its 
                        support (exclusive of income received 
                        in the exercise or performance by such 
                        organization of its charitable, 
                        educational, or other purpose or 
                        function constituting the basis for its 
                        exemption under section 501(a)) from 
                        the United States or any State or 
                        political subdivision thereof or from 
                        direct or indirect contributions from 
                        the general public, and which is 
                        organized and operated exclusively to 
                        receive, hold, invest, and administer 
                        property and to make expenditures to or 
                        for the benefit of a college or 
                        university which is an organization 
                        referred to in clause (ii) of this 
                        subparagraph and which is an agency or 
                        instrumentality of a State or political 
                        subdivision thereof, or which is owned 
                        or operated by a State or political 
                        subdivision thereof or by an agency or 
                        instrumentality of one or more States 
                        or political subdivisions,
                          (v) a governmental unit referred to 
                        in subsection (c)(1),
                          (vi) an organization referred to in 
                        subsection (c)(2) which normally 
                        receives a substantial part of its 
                        support (exclusive of income received 
                        in the exercise or performance by such 
                        organization of its charitable, 
                        educational, or other purpose or 
                        function constituting the basis for its 
                        exemption under section 501(a)) from a 
                        governmental unit referred to in 
                        subsection (c)(1) or from direct or 
                        indirect contributions from the general 
                        public,
                          (vii) a private foundation described 
                        in subparagraph (F),
                          (viii) an organization described in 
                        section 509(a)(2) or (3), or
                          (ix) an agricultural research 
                        organization directly engaged in the 
                        continuous active conduct of 
                        agricultural research (as defined in 
                        section 1404 of the National 
                        Agricultural Research, Extension, and 
                        Teaching Policy Act of 1977) in 
                        conjunction with a land-grant college 
                        or university (as defined in such 
                        section) or a non-land grant college of 
                        agriculture (as defined in such 
                        section), and during the calendar year 
                        in which the contribution is made such 
                        organization is committed to spend such 
                        contribution for such research before 
                        January 1 of the fifth calendar year 
                        which begins after the date such 
                        contribution is made,
                shall be allowed to the extent that the 
                aggregate of such contributions does not exceed 
                50 percent of the taxpayer's contribution base 
                for the taxable year.
                  (B) Other contributions.--Any charitable 
                contribution other than a charitable 
                contribution to which subparagraph (A) applies 
                shall be allowed to the extent that the 
                aggregate of such contributions does not exceed 
                the lesser of--
                          (i) 30 percent of the taxpayer's 
                        contribution base for the taxable year, 
                        or
                          (ii) the excess of 50 percent of the 
                        taxpayer's contribution base for the 
                        taxable year over the amount of 
                        charitable contributions allowable 
                        under subparagraph (A) (determined 
                        without regard to subparagraph (C)).
                If the aggregate of such contributions exceeds 
                the limitation of the preceding sentence, such 
                excess shall be treated (in a manner consistent 
                with the rules of subsection (d)(1)) as a 
                charitable contribution (to which subparagraph 
                (A) does not apply) in each of the 5 succeeding 
                taxable years in order of time.
                  (C) Special limitation with respect to 
                contributions described in subparagraph (A) of 
                certain capital gain property.--
                          (i) In the case of charitable 
                        contributions described in subparagraph 
                        (A) of capital gain property to which 
                        subsection (e)(1)(B) does not apply, 
                        the total amount of contributions of 
                        such property which may be taken into 
                        account under subsection (a) for any 
                        taxable year shall not exceed 30 
                        percent of the taxpayer's contribution 
                        base for such year. For purposes of 
                        this subsection, contributions of 
                        capital gain property to which this 
                        subparagraph applies shall be taken 
                        into account after all other charitable 
                        contributions (other than charitable 
                        contributions to which subparagraph (D) 
                        applies).
                          (ii) If charitable contributions 
                        described in subparagraph (A) of 
                        capital gain property to which clause 
                        (i) applies exceeds 30 percent of the 
                        taxpayer's contribution base for any 
                        taxable year, such excess shall be 
                        treated, in a manner consistent with 
                        the rules of subsection (d)(1), as a 
                        charitable contribution of capital gain 
                        property to which clause (i) applies in 
                        each of the 5 succeeding taxable years 
                        in order of time.
                          (iii) At the election of the taxpayer 
                        (made at such time and in such manner 
                        as the Secretary prescribes by 
                        regulations), subsection (e)(1) shall 
                        apply to all contributions of capital 
                        gain property (to which subsection 
                        (e)(1)(B) does not otherwise apply) 
                        made by the taxpayer during the taxable 
                        year. If such an election is made, 
                        clauses (i) and (ii) shall not apply to 
                        contributions of capital gain property 
                        made during the taxable year, and, in 
                        applying subsection (d)(1) for such 
                        taxable year with respect to 
                        contributions of capital gain property 
                        made in any prior contribution year for 
                        which an election was not made under 
                        this clause, such contributions shall 
                        be reduced as if subsection (e)(1) had 
                        applied to such contributions in the 
                        year in which made.
                          (iv) For purposes of this paragraph, 
                        the term ``capital gain property'' 
                        means, with respect to any 
                        contribution, any capital asset the 
                        sale of which at its fair market value 
                        at the time of the contribution would 
                        have resulted in gain which would have 
                        been long-term capital gain. For 
                        purposes of the preceding sentence, any 
                        property which is property used in the 
                        trade or business (as defined in 
                        section 1231(b)) shall be treated as a 
                        capital asset.
                  (D) Special limitation with respect to 
                contributions of capital gain property to 
                organizations not described in subparagraph 
                (A).--
                          (i) In general.--In the case of 
                        charitable contributions (other than 
                        charitable contributions to which 
                        subparagraph (A) applies) of capital 
                        gain property, the total amount of such 
                        contributions of such property taken 
                        into account under subsection (a) for 
                        any taxable year shall not exceed the 
                        lesser of--
                                  (I) 20 percent of the 
                                taxpayer's contribution base 
                                for the taxable year, or
                                  (II) the excess of 30 percent 
                                of the taxpayer's contribution 
                                base for the taxable year over 
                                the amount of the contributions 
                                of capital gain property to 
                                which subparagraph (C) applies.
                 For purposes of this subsection, contributions 
                of capital gain property to which this 
                subparagraph applies shall be taken into 
                account after all other charitable 
                contributions.
                          (ii) Carryover.--If the aggregate 
                        amount of contributions described in 
                        clause (i) exceeds the limitation of 
                        clause (i), such excess shall be 
                        treated (in a manner consistent with 
                        the rules of subsection (d)(1)) as a 
                        charitable contribution of capital gain 
                        property to which clause (i) applies in 
                        each of the 5 succeeding taxable years 
                        in order of time.
                  (E) Contributions of qualified conservation 
                contributions.--
                          (i) In general.--Any qualified 
                        conservation contribution (as defined 
                        in subsection (h)(1)) shall be allowed 
                        to the extent the aggregate of such 
                        contributions does not exceed the 
                        excess of 50 percent of the taxpayer's 
                        contribution base over the amount of 
                        all other charitable contributions 
                        allowable under this paragraph.
                          (ii) Carryover.--If the aggregate 
                        amount of contributions described in 
                        clause (i) exceeds the limitation of 
                        clause (i), such excess shall be 
                        treated (in a manner consistent with 
                        the rules of subsection (d)(1)) as a 
                        charitable contribution to which clause 
                        (i) applies in each of the 15 
                        succeeding years in order of time.
                          (iii) Coordination with other 
                        subparagraphs.--For purposes of 
                        applying this subsection and subsection 
                        (d)(1), contributions described in 
                        clause (i) shall not be treated as 
                        described in subparagraph (A), (B), 
                        (C), or (D) and such subparagraphs 
                        shall apply without regard to such 
                        contributions.
                          (iv) Special rule for contribution of 
                        property used in agriculture or 
                        livestock production.--
                                  (I) In general.--If the 
                                individual is a qualified 
                                farmer or rancher for the 
                                taxable year for which the 
                                contribution is made, clause 
                                (i) shall be applied by 
                                substituting ``100 percent'' 
                                for ``50 percent''.
                                  (II) Exception.--Subclause 
                                (I) shall not apply to any 
                                contribution of property made 
                                after the date of the enactment 
                                of this subparagraph which is 
                                used in agriculture or 
                                livestock production (or 
                                available for such production) 
                                unless such contribution is 
                                subject to a restriction that 
                                such property remain available 
                                for such production. This 
                                subparagraph shall be applied 
                                separately with respect to 
                                property to which subclause (I) 
                                does not apply by reason of the 
                                preceding sentence prior to its 
                                application to property to 
                                which subclause (I) does apply.
                          (v) Definition.--For purposes of 
                        clause (iv), the term ``qualified 
                        farmer or rancher'' means a taxpayer 
                        whose gross income from the trade or 
                        business of farming (within the meaning 
                        of section 2032A(e)(5)) is greater than 
                        50 percent of the taxpayer's gross 
                        income for the taxable year.
                  (F) Certain private foundations.--The private 
                foundations referred to in subparagraph 
                (A)(vii) and subsection (e)(1)(B) are--
                          (i) a private operating foundation 
                        (as defined in section 4942(j)(3)),
                          (ii) any other private foundation (as 
                        defined in section 509(a)) which, not 
                        later than the 15th day of the third 
                        month after the close of the 
                        foundation's taxable year in which 
                        contributions are received, makes 
                        qualifying distributions (as defined in 
                        section 4942(g), without regard to 
                        paragraph (3) thereof), which are 
                        treated, after the application of 
                        section 4942(g)(3), as distributions 
                        out of corpus (in accordance with 
                        section 4942(h)) in an amount equal to 
                        100 percent of such contributions, and 
                        with respect to which the taxpayer 
                        obtains adequate records or other 
                        sufficient evidence from the foundation 
                        showing that the foundation made such 
                        qualifying distributions, and
                          (iii) a private foundation all of the 
                        contributions to which are pooled in a 
                        common fund and which would be 
                        described in section 509(a)(3) but for 
                        the right of any substantial 
                        contributor (hereafter in this clause 
                        called ``donor'') or [his spouse] the 
                        spouse of such donor to designate 
                        annually the recipients, from among 
                        organizations described in paragraph 
                        (1) of section 509(a), of the income 
                        attributable to the donor's 
                        contribution to the fund and to direct 
                        (by deed or by will) the payment, to an 
                        organization described in such 
                        paragraph (1), of the corpus in the 
                        common fund attributable to the donor's 
                        contribution; but this clause shall 
                        apply only if all of the income of the 
                        common fund is required to be (and is) 
                        distributed to one or more 
                        organizations described in such 
                        paragraph (1) not later than the 15th 
                        day of the third month after the close 
                        of the taxable year in which the income 
                        is realized by the fund and only if all 
                        of the corpus attributable to any 
                        donor's contribution to the fund is 
                        required to be (and is) distributed to 
                        one or more of such organizations not 
                        later than one year after [his death or 
                        after the death of his surviving spouse 
                        if she] the death of the donor or after 
                        the death of the donor's surviving 
                        spouse if such surviving spouse has the 
                        right to designate the recipients of 
                        such corpus.
                  (G) Increased limitation for cash 
                contributions.--
                          (i) In general.--In the case of any 
                        contribution of cash to an organization 
                        described in subparagraph (A), the 
                        total amount of such contributions 
                        which may be taken into account under 
                        subsection (a) for any taxable year 
                        beginning after December 31, 2017, and 
                        before January 1, 2026, shall not 
                        exceed 60 percent of the taxpayer's 
                        contribution base for such year.
                          (ii) Carryover.--If the aggregate 
                        amount of contributions described in 
                        clause (i) exceeds the applicable 
                        limitation under clause (i) for any 
                        taxable year described in such clause, 
                        such excess shall be treated (in a 
                        manner consistent with the rules of 
                        subsection (d)(1)) as a charitable 
                        contribution to which clause (i) 
                        applies in each of the 5 succeeding 
                        years in order of time.
                          (iii) Coordination with subparagraphs 
                        (A) and (B).--
                                  (I) In general.--
                                Contributions taken into 
                                account under this subparagraph 
                                shall not be taken into account 
                                under subparagraph (A).
                                  (II) Limitation reduction.--
                                For each taxable year described 
                                in clause (i), and each taxable 
                                year to which any contribution 
                                under this subparagraph is 
                                carried over under clause (ii), 
                                subparagraph (A) shall be 
                                applied by reducing (but not 
                                below zero) the contribution 
                                limitation allowed for the 
                                taxable year under such 
                                subparagraph by the aggregate 
                                contributions allowed under 
                                this subparagraph for such 
                                taxable year, and subparagraph 
                                (B) shall be applied by 
                                treating any reference to 
                                subparagraph (A) as a reference 
                                to both subparagraph (A) and 
                                this subparagraph.
                  (H) Contribution base defined.--For purposes 
                of this section, the term ``contribution base'' 
                means adjusted gross income (computed without 
                regard to any net operating loss carryback to 
                the taxable year under section 172).
          (2) Corporations.--In the case of a corporation--
                  (A) In general.--The total deductions under 
                subsection (a) for any taxable year (other than 
                for contributions to which subparagraph (B) or 
                (C) applies) shall not exceed 10 percent of the 
                taxpayer's taxable income.
                  (B) Qualified conservation contributions by 
                certain corporate farmers and ranchers.--
                          (i) In general.--Any qualified 
                        conservation contribution (as defined 
                        in subsection (h)(1))--
                                  (I) which is made by a 
                                corporation which, for the 
                                taxable year during which the 
                                contribution is made, is a 
                                qualified farmer or rancher (as 
                                defined in paragraph (1)(E)(v)) 
                                and the stock of which is not 
                                readily tradable on an 
                                established securities market 
                                at any time during such year, 
                                and
                                  (II) which, in the case of 
                                contributions made after the 
                                date of the enactment of this 
                                subparagraph, is a contribution 
                                of property which is used in 
                                agriculture or livestock 
                                production (or available for 
                                such production) and which is 
                                subject to a restriction that 
                                such property remain available 
                                for such production,
                 shall be allowed to the extent the aggregate 
                of such contributions does not exceed the 
                excess of the taxpayer's taxable income over 
                the amount of charitable contributions 
                allowable under subparagraph (A).
                          (ii) Carryover.--If the aggregate 
                        amount of contributions described in 
                        clause (i) exceeds the limitation of 
                        clause (i), such excess shall be 
                        treated (in a manner consistent with 
                        the rules of subsection (d)(2)) as a 
                        charitable contribution to which clause 
                        (i) applies in each of the 15 
                        succeeding taxable years in order of 
                        time.
                  (C) Qualified conservation contributions by 
                certain Native Corporations.--
                          (i) In general.--Any qualified 
                        conservation contribution (as defined 
                        in subsection (h)(1)) which--
                                  (I) is made by a Native 
                                Corporation, and
                                  (II) is a contribution of 
                                property which was land 
                                conveyed under the Alaska 
                                Native Claims Settlement Act,
                 shall be allowed to the extent that the 
                aggregate amount of such contributions does not 
                exceed the excess of the taxpayer's taxable 
                income over the amount of charitable 
                contributions allowable under subparagraph (A).
                          (ii) Carryover.--If the aggregate 
                        amount of contributions described in 
                        clause (i) exceeds the limitation of 
                        clause (i), such excess shall be 
                        treated (in a manner consistent with 
                        the rules of subsection (d)(2)) as a 
                        charitable contribution to which clause 
                        (i) applies in each of the 15 
                        succeeding taxable years in order of 
                        time.
                          (iii) Native Corporation.--For 
                        purposes of this subparagraph, the term 
                        ``Native Corporation'' has the meaning 
                        given such term by section 3(m) of the 
                        Alaska Native Claims Settlement Act.
                  (D) Taxable income.--For purposes of this 
                paragraph, taxable income shall be computed 
                without regard to--
                          (i) this section,
                          (ii) part VIII (except section 248),
                          (iii) any net operating loss 
                        carryback to the taxable year under 
                        section 172,
                          (iv) any capital loss carryback to 
                        the taxable year under section 
                        1212(a)(1)
                          (v) section 199A(g).
  (c) Charitable contribution defined.--For purposes of this 
section, the term ``charitable contribution'' means a 
contribution or gift to or for the use of--
          (1) A State, a possession of the United States, or 
        any political subdivision of any of the foregoing, or 
        the United States or the District of Columbia, but only 
        if the contribution or gift is made for exclusively 
        public purposes.
          (2) A corporation, trust, or community chest, fund, 
        or foundation--
                  (A) created or organized in the United States 
                or in any possession thereof, or under the law 
                of the United States, any State, the District 
                of Columbia, or any possession of the United 
                States;
                  (B) organized and operated exclusively for 
                religious, charitable, scientific, literary, or 
                educational purposes, or to foster national or 
                international amateur sports competition (but 
                only if no part of its activities involve the 
                provision of athletic facilities or equipment), 
                or for the prevention of cruelty to children or 
                animals;
                  (C) no part of the net earnings of which 
                inures to the benefit of any private 
                shareholder or individual; and
                  (D) which is not disqualified for tax 
                exemption under section 501(c)(3) by reason of 
                attempting to influence legislation, and which 
                does not participate in, or intervene in 
                (including the publishing or distributing of 
                statements), any political campaign on behalf 
                of (or in opposition to) any candidate for 
                public office.
        A contribution or gift by a corporation to a trust, 
        chest, fund, or foundation shall be deductible by 
        reason of this paragraph only if it is to be used 
        within the United States or any of its possessions 
        exclusively for purposes specified in subparagraph (B). 
        Rules similar to the rules of section 501(j) shall 
        apply for purposes of this paragraph.
          (3) A post or organization of war veterans, or an 
        auxiliary unit or society of, or trust or foundation 
        for, any such post or organization--
                  (A) organized in the United States or any of 
                its possessions, and
                  (B) no part of the net earnings of which 
                inures to the benefit of any private 
                shareholder or individual.
          (4) In the case of a contribution or gift by an 
        individual, a domestic fraternal society, order, or 
        association, operating under the lodge system, but only 
        if such contribution or gift is to be used exclusively 
        for religious, charitable, scientific, literary, or 
        educational purposes, or for the prevention of cruelty 
        to children or animals.
          (5) A cemetery company owned and operated exclusively 
        for the benefit of its members, or any corporation 
        chartered solely for burial purposes as a cemetery 
        corporation and not permitted by its charter to engage 
        in any business not necessarily incident to that 
        purpose, if such company or corporation is not operated 
        for profit and no part of the net earnings of such 
        company or corporation inures to the benefit of any 
        private shareholder or individual.
For purposes of this section, the term ``charitable 
contribution'' also means an amount treated under subsection 
(g) as paid for the use of an organization described in 
paragraph (2), (3), or (4).
  (d) Carryovers of excess contributions.--
          (1) Individuals.--
                  (A) In general.--In the case of an 
                individual, if the amount of charitable 
                contributions described in subsection (b)(1)(A) 
                payment of which is made within a taxable year 
                (hereinafter in this paragraph referred to as 
                the ``contribution year'') exceeds 50 percent 
                of the taxpayer's contribution base for such 
                year, such excess shall be treated as a 
                charitable contribution described in subsection 
                (b)(1)(A) paid in each of the 5 succeeding 
                taxable years in order of time, but, with 
                respect to any such succeeding taxable year, 
                only to the extent of the lesser of the two 
                following amounts:
                          (i) the amount by which 50 percent of 
                        the taxpayer's contribution base for 
                        such succeeding taxable year exceeds 
                        the sum of the charitable contributions 
                        described in subsection (b)(1)(A) 
                        payment of which is made by the 
                        taxpayer within such succeeding taxable 
                        year (determined without regard to this 
                        subparagraph) and the charitable 
                        contributions described in subsection 
                        (b)(1)(A) payment of which was made in 
                        taxable years before the contribution 
                        year which are treated under this 
                        subparagraph as having been paid in 
                        such succeeding taxable year; or
                          (ii) in the case of the first 
                        succeeding taxable year, the amount of 
                        such excess, and in the case of the 
                        second, third, fourth, or fifth 
                        succeeding taxable year, the portion of 
                        such excess not treated under this 
                        subparagraph as a charitable 
                        contribution described in subsection 
                        (b)(1)(A) paid in any taxable year 
                        intervening between the contribution 
                        year and such succeeding taxable year.
                  (B) Special rule for net operating loss 
                carryovers.--In applying subparagraph (A), the 
                excess determined under subparagraph (A) for 
                the contribution year shall be reduced to the 
                extent that such excess reduces taxable income 
                (as computed for purposes of the second 
                sentence of section 172(b)(2)) and increases 
                the net operating loss deduction for a taxable 
                year succeeding the contribution year.
          (2) Corporations.--
                  (A) In general.--Any contribution made by a 
                corporation in a taxable year (hereinafter in 
                this paragraph referred to as the 
                ``contribution year'') in excess of the amount 
                deductible for such year under subsection 
                (b)(2)(A) shall be deductible for each of the 5 
                succeeding taxable years in order of time, but 
                only to the extent of the lesser of the two 
                following amounts: (i) the excess of the 
                maximum amount deductible for such succeeding 
                taxable year under subsection (b)(2)(A) over 
                the sum of the contributions made in such year 
                plus the aggregate of the excess contributions 
                which were made in taxable years before the 
                contribution year and which are deductible 
                under this subparagraph for such succeeding 
                taxable year; or (ii) in the case of the first 
                succeeding taxable year, the amount of such 
                excess contribution, and in the case of the 
                second, third, fourth, or fifth succeeding 
                taxable year, the portion of such excess 
                contribution not deductible under this 
                subparagraph for any taxable year intervening 
                between the contribution year and such 
                succeeding taxable year.
                  (B) Special rule for net operating loss 
                carryovers.--For purposes of subparagraph (A), 
                the excess of--
                          (i) the contributions made by a 
                        corporation in a taxable year to which 
                        this section applies, over
                          (ii) the amount deductible in such 
                        year under the limitation in subsection 
                        (b)(2)(A),
                shall be reduced to the extent that such excess 
                reduces taxable income (as computed for 
                purposes of the second sentence of section 
                172(b)(2)) and increases a net operating loss 
                carryover under section 172 to a succeeding 
                taxable year.
  (e) Certain contributions of ordinary income and capital gain 
property.--
          (1) General rule.--The amount of any charitable 
        contribution of property otherwise taken into account 
        under this section shall be reduced by the sum of--
                  (A) the amount of gain which would not have 
                been long-term capital gain (determined without 
                regard to section 1221(b)(3)) if the property 
                contributed had been sold by the taxpayer at 
                its fair market value (determined at the time 
                of such contribution), and
                  (B) in the case of a charitable 
                contribution--
                          (i) of tangible personal property--
                                  (I) if the use by the donee 
                                is unrelated to the purpose or 
                                function constituting the basis 
                                for its exemption under section 
                                501 (or, in the case of a 
                                governmental unit, to any 
                                purpose or function described 
                                in subsection (c)), or
                                  (II) which is applicable 
                                property (as defined in 
                                paragraph (7)(C), but without 
                                regard to clause (ii) thereof) 
                                which is sold, exchanged, or 
                                otherwise disposed of by the 
                                donee before the last day of 
                                the taxable year in which the 
                                contribution was made and with 
                                respect to which the donee has 
                                not made a certification in 
                                accordance with paragraph 
                                (7)(D),
                          (ii) to or for the use of a private 
                        foundation (as defined in section 
                        509(a)), other than a private 
                        foundation described in subsection 
                        (b)(1)(F),
                          (iii) of any patent, copyright (other 
                        than a copyright described in section 
                        1221(a)(3) or 1231(b)(1)(C)), 
                        trademark, trade name, trade secret, 
                        know-how, software (other than software 
                        described in section 197(e)(3)(A)(i)), 
                        or similar property, or applications or 
                        registrations of such property, or
                          (iv) of any taxidermy property which 
                        is contributed by the person who 
                        prepared, stuffed, or mounted the 
                        property or by any person who paid or 
                        incurred the cost of such preparation, 
                        stuffing, or mounting,
                the amount of gain which would have been long-
                term capital gain if the property contributed 
                had been sold by the taxpayer at its fair 
                market value (determined at the time of such 
                contribution).
        For purposes of applying this paragraph (other than in 
        the case of gain to which section 617(d)(1), 1245(a), 
        1250(a), 1252(a), or 1254(a) applies), property which 
        is property used in the trade or business (as defined 
        in section 1231(b)) shall be treated as a capital 
        asset. For purposes of applying this paragraph in the 
        case of a charitable contribution of stock in an S 
        corporation, rules similar to the rules of section 751 
        shall apply in determining whether gain on such stock 
        would have been long-term capital gain if such stock 
        were sold by the taxpayer.
          (2) Allocation of basis.--For purposes of paragraph 
        (1), in the case of a charitable contribution of less 
        than the taxpayer's entire interest in the property 
        contributed, the taxpayer's adjusted basis in such 
        property shall be allocated between the interest 
        contributed and any interest not contributed in 
        accordance with regulations prescribed by the 
        Secretary.
          (3) Special rule for certain contributions of 
        inventory and other property.--
                  (A) Qualified contributions.--For purposes of 
                this paragraph, a qualified contribution shall 
                mean a charitable contribution of property 
                described in paragraph (1) or (2) of section 
                1221(a), by a corporation (other than a 
                corporation which is an S corporation) to an 
                organization which is described in section 
                501(c)(3) and is exempt under section 501(a) 
                (other than a private foundation, as defined in 
                section 509(a), which is not an operating 
                foundation, as defined in section 4942(j)(3)), 
                but only if--
                          (i) the use of the property by the 
                        donee is related to the purpose or 
                        function constituting the basis for its 
                        exemption under section 501 and the 
                        property is to be used by the donee 
                        solely for the care of the ill, the 
                        needy, or infants;
                          (ii) the property is not transferred 
                        by the donee in exchange for money, 
                        other property, or services;
                          (iii) the taxpayer receives from the 
                        donee a written statement representing 
                        that its use and disposition of the 
                        property will be in accordance with the 
                        provisions of clauses (i) and (ii); and
                          (iv) in the case where the property 
                        is subject to regulation under the 
                        Federal Food, Drug, and Cosmetic Act, 
                        as amended, such property must fully 
                        satisfy the applicable requirements of 
                        such Act and regulations promulgated 
                        thereunder on the date of transfer and 
                        for one hundred and eighty days prior 
                        thereto.
                  (B) Amount of reduction.--The reduction under 
                paragraph (1)(A) for any qualified contribution 
                (as defined in subparagraph (A)) shall be no 
                greater than the sum of--
                          (i) one-half of the amount computed 
                        under paragraph (1)(A) (computed 
                        without regard to this paragraph), and
                          (ii) the amount (if any) by which the 
                        charitable contribution deduction under 
                        this section for any qualified 
                        contribution (computed by taking into 
                        account the amount determined in clause 
                        (i), but without regard to this clause) 
                        exceeds twice the basis of such 
                        property.
                  (C) Special rule for contributions of food 
                inventory.--
                          (i) General rule.--In the case of a 
                        charitable contribution of food from 
                        any trade or business of the taxpayer, 
                        this paragraph shall be applied--
                                  (I) without regard to whether 
                                the contribution is made by a C 
                                corporation, and
                                  (II) only to food that is 
                                apparently wholesome food.
                          (ii) Limitation.--The aggregate 
                        amount of such contributions for any 
                        taxable year which may be taken into 
                        account under this section shall not 
                        exceed--
                                  (I) in the case of any 
                                taxpayer other than a C 
                                corporation, 15 percent of the 
                                taxpayer's aggregate net income 
                                for such taxable year from all 
                                trades or businesses from which 
                                such contributions were made 
                                for such year, computed without 
                                regard to this section, and
                                  (II) in the case of a C 
                                corporation, 15 percent of 
                                taxable income (as defined in 
                                subsection (b)(2)(D)).
                          (iii) Rules related to limitation.--
                                  (I) Carryover.--If such 
                                aggregate amount exceeds the 
                                limitation imposed under clause 
                                (ii), such excess shall be 
                                treated (in a manner consistent 
                                with the rules of subsection 
                                (d)) as a charitable 
                                contribution described in 
                                clause (i) in each of the 5 
                                succeeding taxable years in 
                                order of time.
                                  (II) Coordination with 
                                overall corporate limitation.--
                                In the case of any charitable 
                                contribution which is allowable 
                                after the application of clause 
                                (ii)(II), subsection (b)(2)(A) 
                                shall not apply to such 
                                contribution, but the 
                                limitation imposed by such 
                                subsection shall be reduced 
                                (but not below zero) by the 
                                aggregate amount of such 
                                contributions. For purposes of 
                                subsection (b)(2)(B), such 
                                contributions shall be treated 
                                as allowable under subsection 
                                (b)(2)(A).
                          (iv) Determination of basis for 
                        certain taxpayers.--If a taxpayer--
                                  (I) does not account for 
                                inventories under section 471, 
                                and
                                  (II) is not required to 
                                capitalize indirect costs under 
                                section 263A,
                 the taxpayer may elect, solely for purposes of 
                subparagraph (B), to treat the basis of any 
                apparently wholesome food as being equal to 25 
                percent of the fair market value of such food.
                          (v) Determination of fair market 
                        value.--In the case of any such 
                        contribution of apparently wholesome 
                        food which cannot or will not be sold 
                        solely by reason of internal standards 
                        of the taxpayer, lack of market, or 
                        similar circumstances, or by reason of 
                        being produced by the taxpayer 
                        exclusively for the purposes of 
                        transferring the food to an 
                        organization described in subparagraph 
                        (A), the fair market value of such 
                        contribution shall be determined--
                                  (I) without regard to such 
                                internal standards, such lack 
                                of market, such circumstances, 
                                or such exclusive purpose, and
                                  (II) by taking into account 
                                the price at which the same or 
                                substantially the same food 
                                items (as to both type and 
                                quality) are sold by the 
                                taxpayer at the time of the 
                                contribution (or, if not so 
                                sold at such time, in the 
                                recent past).
                          (vi) Apparently wholesome food.--For 
                        purposes of this subparagraph, the term 
                        ``apparently wholesome food'' has the 
                        meaning given to such term by section 
                        22(b)(2) of the Bill Emerson Good 
                        Samaritan Food Donation Act (42 U.S.C. 
                        1791(b)(2)), as in effect on the date 
                        of the enactment of this subparagraph.
                  (D) This paragraph shall not apply to so much 
                of the amount of the gain described in 
                paragraph (1)(A) which would be long-term 
                capital gain but for the application of 
                sections 617, 1245, 1250, or 1252.
          (4) Special rule for contributions of scientific 
        property used for research.--
                  (A) Limit on reduction.--In the case of a 
                qualified research contribution, the reduction 
                under paragraph (1)(A) shall be no greater than 
                the amount determined under paragraph (3)(B).
                  (B) Qualified research contributions.--For 
                purposes of this paragraph, the term 
                ``qualified research contribution'' means a 
                charitable contribution by a corporation of 
                tangible personal property described in 
                paragraph (1) of section 1221(a), but only if--
                          (i) the contribution is to an 
                        organization described in subparagraph 
                        (A) or subparagraph (B) of section 
                        41(e)(6),
                          (ii) the property is constructed or 
                        assembled by the taxpayer,
                          (iii) the contribution is made not 
                        later than 2 years after the date the 
                        construction or assembly of the 
                        property is substantially completed,
                          (iv) the original use of the property 
                        is by the donee,
                          (v) the property is scientific 
                        equipment or apparatus substantially 
                        all of the use of which by the donee is 
                        for research or experimentation (within 
                        the meaning of section 174), or for 
                        research training, in the United States 
                        in physical or biological sciences,
                          (vi) the property is not transferred 
                        by the donee in exchange for money, 
                        other property, or services, and
                          (vii) the taxpayer receives from the 
                        donee a written statement representing 
                        that its use and disposition of the 
                        property will be in accordance with the 
                        provisions of clauses (v) and (vi).
                  (C) Construction of property by taxpayer.--
                For purposes of this paragraph, property shall 
                be treated as constructed by the taxpayer only 
                if the cost of the parts used in the 
                construction of such property (other than parts 
                manufactured by the taxpayer or a related 
                person) do not exceed 50 percent of the 
                taxpayer's basis in such property.
                  (D) Corporation.--For purposes of this 
                paragraph, the term ``corporation'' shall not 
                include--
                          (i) an S corporation,
                          (ii) a personal holding company (as 
                        defined in section 542), and
                          (iii) a service organization (as 
                        defined in section 414(m)(3)).
          (5) Special rule for contributions of stock for which 
        market quotations are readily available.--
                  (A) In general.--Subparagraph (B)(ii) of 
                paragraph (1) shall not apply to any 
                contribution of qualified appreciated stock.
                  (B) Qualified appreciated stock.--Except as 
                provided in subparagraph (C), for purposes of 
                this paragraph, the term ``qualified 
                appreciated stock'' means any stock of a 
                corporation--
                          (i) for which (as of the date of the 
                        contribution) market quotations are 
                        readily available on an established 
                        securities market, and
                          (ii) which is capital gain property 
                        (as defined in subsection 
                        (b)(1)(C)(iv)).
                  (C) Donor may not contribute more than 10 
                percent of stock of corporation.--
                          (i) In general.--In the case of any 
                        donor, the term ``qualified appreciated 
                        stock'' shall not include any stock of 
                        a corporation contributed by the donor 
                        in a contribution to which paragraph 
                        (1)(B)(ii) applies (determined without 
                        regard to this paragraph) to the extent 
                        that the amount of the stock so 
                        contributed (when increased by the 
                        aggregate amount of all prior such 
                        contributions by the donor of stock in 
                        such corporation) exceeds 10 percent 
                        (in value) of all of the outstanding 
                        stock of such corporation.
                          (ii) Special rule.--For purposes of 
                        clause (i), an individual shall be 
                        treated as making all contributions 
                        made by any member of his family (as 
                        defined in section 267(c)(4)).
          (7) Recapture of deduction on certain dispositions of 
        exempt use property.--
                  (A) In general.--In the case of an applicable 
                disposition of applicable property, there shall 
                be included in the income of the donor of such 
                property for the taxable year of such donor in 
                which the applicable disposition occurs an 
                amount equal to the excess (if any) of--
                          (i) the amount of the deduction 
                        allowed to the donor under this section 
                        with respect to such property, over
                          (ii) the donor's basis in such 
                        property at the time such property was 
                        contributed.
                  (B) Applicable disposition.--For purposes of 
                this paragraph, the term ``applicable 
                disposition'' means any sale, exchange, or 
                other disposition by the donee of applicable 
                property--
                          (i) after the last day of the taxable 
                        year of the donor in which such 
                        property was contributed, and
                          (ii) before the last day of the 3-
                        year period beginning on the date of 
                        the contribution of such property,
                unless the donee makes a certification in 
                accordance with subparagraph (D).
                  (C) Applicable property.--For purposes of 
                this paragraph, the term ``applicable 
                property'' means charitable deduction property 
                (as defined in section 6050L(a)(2)(A))--
                          (i) which is tangible personal 
                        property the use of which is identified 
                        by the donee as related to the purpose 
                        or function constituting the basis of 
                        the donee's exemption under section 
                        501, and
                          (ii) for which a deduction in excess 
                        of the donor's basis is allowed.
                  (D) Certification.--A certification meets the 
                requirements of this subparagraph if it is a 
                written statement which is signed under penalty 
                of perjury by an officer of the donee 
                organization and--
                          (i) which--
                                  (I) certifies that the use of 
                                the property by the donee was 
                                substantial and related to the 
                                purpose or function 
                                constituting the basis for the 
                                donee's exemption under section 
                                501, and
                                  (II) describes how the 
                                property was used and how such 
                                use furthered such purpose or 
                                function, or
                          (ii) which--
                                  (I) states the intended use 
                                of the property by the donee at 
                                the time of the contribution, 
                                and
                                  (II) certifies that such 
                                intended use has become 
                                impossible or infeasible to 
                                implement.
  (f) Disallowance of deduction in certain cases and special 
rules.--
          (1) In general.--No deduction shall be allowed under 
        this section for a contribution to or for the use of an 
        organization or trust described in section 508(d) or 
        4948(c)(4) subject to the conditions specified in such 
        sections.
          (2) Contributions of property placed in trust.--
                  (A) Remainder interest.--In the case of 
                property transferred in trust, no deduction 
                shall be allowed under this section for the 
                value of a contribution of a remainder interest 
                unless the trust is a charitable remainder 
                annuity trust or a charitable remainder 
                unitrust (described in section 664), or a 
                pooled income fund (described in section 
                642(c)(5)).
                  (B) Income interests, etc..--No deduction 
                shall be allowed under this section for the 
                value of any interest in property (other than a 
                remainder interest) transferred in trust unless 
                the interest is in the form of a guaranteed 
                annuity or the trust instrument specifies that 
                the interest is a fixed percentage distributed 
                yearly of the fair market value of the trust 
                property (to be determined yearly) and the 
                grantor is treated as the owner of such 
                interest for purposes of applying section 671. 
                If the donor ceases to be treated as the owner 
                of such an interest for purposes of applying 
                section 671, at the time the donor ceases to be 
                so treated, the donor shall for purposes of 
                this chapter be considered as having received 
                an amount of income equal to the amount of any 
                deduction he received under this section for 
                the contribution reduced by the discounted 
                value of all amounts of income earned by the 
                trust and taxable to him before the time at 
                which he ceases to be treated as the owner of 
                the interest. Such amounts of income shall be 
                discounted to the date of the contribution. The 
                Secretary shall prescribe such regulations as 
                may be necessary to carry out the purposes of 
                this subparagraph.
                  (C) Denial of deduction in case of payments 
                by certain trusts.--In any case in which a 
                deduction is allowed under this section for the 
                value of an interest in property described in 
                subparagraph (B), transferred in trust, no 
                deduction shall be allowed under this section 
                to the grantor or any other person for the 
                amount of any contribution made by the trust 
                with respect to such interest.
                  (D) Exception.--This paragraph shall not 
                apply in a case in which the value of all 
                interests in property transferred in trust are 
                deductible under subsection (a).
          (3) Denial of deduction in case of certain 
        contributions of partial interests in property.--
                  (A) In general.--In the case of a 
                contribution (not made by a transfer in trust) 
                of an interest in property which consists of 
                less than the taxpayer's entire interest in 
                such property, a deduction shall be allowed 
                under this section only to the extent that the 
                value of the interest contributed would be 
                allowable as a deduction under this section if 
                such interest had been transferred in trust. 
                For purposes of this subparagraph, a 
                contribution by a taxpayer of the right to use 
                property shall be treated as a contribution of 
                less than the taxpayer's entire interest in 
                such property.
                  (B) Exceptions.--Subparagraph (A) shall not 
                apply to--
                          (i) a contribution of a remainder 
                        interest in a personal residence or 
                        farm,
                          (ii) a contribution of an undivided 
                        portion of the taxpayer's entire 
                        interest in property, and
                          (iii) a qualified conservation 
                        contribution.
          (4) Valuation of remainder interest in real 
        property.--For purposes of this section, in determining 
        the value of a remainder interest in real property, 
        depreciation (computed on the straight line method) and 
        depletion of such property shall be taken into account, 
        and such value shall be discounted at a rate of 6 
        percent per annum, except that the Secretary may 
        prescribe a different rate.
          (5) Reduction for certain interest.--If, in 
        connection with any charitable contribution, a 
        liability is assumed by the recipient or by any other 
        person, or if a charitable contribution is of property 
        which is subject to a liability, then, to the extent 
        necessary to avoid the duplication of amounts, the 
        amount taken into account for purposes of this section 
        as the amount of the charitable contribution--
                  (A) shall be reduced for interest (i) which 
                has been paid (or is to be paid) by the 
                taxpayer, (ii) which is attributable to the 
                liability, and (iii) which is attributable to 
                any period after the making of the 
                contribution, and
                  (B) in the case of a bond, shall be further 
                reduced for interest (i) which has been paid 
                (or is to be paid) by the taxpayer on 
                indebtedness incurred or continued to purchase 
                or carry such bond, and (ii) which is 
                attributable to any period before the making of 
                the contribution.
        The reduction pursuant to subparagraph (B) shall not 
        exceed the interest (including interest equivalent) on 
        the bond which is attributable to any period before the 
        making of the contribution and which is not (under the 
        taxpayer's method of accounting) includible in the 
        gross income of the taxpayer for any taxable year. For 
        purposes of this paragraph, the term ``bond'' means any 
        bond, debenture, note, or certificate or other evidence 
        of indebtedness.
          (6) Deductions for out-of-pocket expenditures.--No 
        deduction shall be allowed under this section for an 
        out-of-pocket expenditure made by any person on behalf 
        of an organization described in subsection (c) (other 
        than an organization described in section 501(h)(5) 
        (relating to churches, etc.)) if the expenditure is 
        made for the purpose of influencing legislation (within 
        the meaning of section 501(c)(3)).
          (7) Reformations to comply with paragraph (2).--
                  (A) In general.--A deduction shall be allowed 
                under subsection (a) in respect of any 
                qualified reformation (within the meaning of 
                section 2055(e)(3)(B)).
                  (B) Rules similar to section 2055(e)(3) to 
                apply.--For purposes of this paragraph, rules 
                similar to the rules of section 2055(e)(3) 
                shall apply.
          (8) Substantiation requirement for certain 
        contributions.--
                  (A) General rule.--No deduction shall be 
                allowed under subsection (a) for any 
                contribution of $250 or more unless the 
                taxpayer substantiates the contribution by a 
                contemporaneous written acknowledgment of the 
                contribution by the donee organization that 
                meets the requirements of subparagraph (B).
                  (B) Content of acknowledgement.--An 
                acknowledgement meets the requirements of this 
                subparagraph if it includes the following 
                information:
                          (i) The amount of cash and a 
                        description (but not value) of any 
                        property other than cash contributed.
                          (ii) Whether the donee organization 
                        provided any goods or services in 
                        consideration, in whole or in part, for 
                        any property described in clause (i).
                          (iii) A description and good faith 
                        estimate of the value of any goods or 
                        services referred to in clause (ii) or, 
                        if such goods or services consist 
                        solely of intangible religious 
                        benefits, a statement to that effect.
                For purposes of this subparagraph, the term 
                ``intangible religious benefit'' means any 
                intangible religious benefit which is provided 
                by an organization organized exclusively for 
                religious purposes and which generally is not 
                sold in a commercial transaction outside the 
                donative context.
                  (C) Contemporaneous.--For purposes of 
                subparagraph (A), an acknowledgment shall be 
                considered to be contemporaneous if the 
                taxpayer obtains the acknowledgment on or 
                before the earlier of--
                          (i) the date on which the taxpayer 
                        files a return for the taxable year in 
                        which the contribution was made, or
                          (ii) the due date (including 
                        extensions) for filing such return.
                  (D) Regulations.--The Secretary shall 
                prescribe such regulations as may be necessary 
                or appropriate to carry out the purposes of 
                this paragraph, including regulations that may 
                provide that some or all of the requirements of 
                this paragraph do not apply in appropriate 
                cases.
          (9) Denial of deduction where contribution for 
        lobbying activities.--No deduction shall be allowed 
        under this section for a contribution to an 
        organization which conducts activities to which section 
        162(e)(1) applies on matters of direct financial 
        interest to the donor's trade or business, if a 
        principal purpose of the contribution was to avoid 
        Federal income tax by securing a deduction for such 
        activities under this section which would be disallowed 
        by reason of section 162(e) if the donor had conducted 
        such activities directly. No deduction shall be allowed 
        under section 162(a) for any amount for which a 
        deduction is disallowed under the preceding sentence.
          (10) Split-dollar life insurance, annuity, and 
        endowment contracts.--
                  (A) In general.--Nothing in this section or 
                in section 545(b)(2), 642(c), 2055, 2106(a)(2), 
                or 2522 shall be construed to allow a 
                deduction, and no deduction shall be allowed, 
                for any transfer to or for the use of an 
                organization described in subsection (c) if in 
                connection with such transfer--
                          (i) the organization directly or 
                        indirectly pays, or has previously 
                        paid, any premium on any personal 
                        benefit contract with respect to the 
                        transferor, or
                          (ii) there is an understanding or 
                        expectation that any person will 
                        directly or indirectly pay any premium 
                        on any personal benefit contract with 
                        respect to the transferor.
                  (B) Personal benefit contract.--For purposes 
                of subparagraph (A), the term ``personal 
                benefit contract'' means, with respect to the 
                transferor, any life insurance, annuity, or 
                endowment contract if any direct or indirect 
                beneficiary under such contract is the 
                transferor, any member of the transferor's 
                family, or any other person (other than an 
                organization described in subsection (c)) 
                designated by the transferor.
                  (C) Application to charitable remainder 
                trusts.--In the case of a transfer to a trust 
                referred to in subparagraph (E), references in 
                subparagraphs (A) and (F) to an organization 
                described in subsection (c) shall be treated as 
                a reference to such trust.
                  (D) Exception for certain annuity 
                contracts.--If, in connection with a transfer 
                to or for the use of an organization described 
                in subsection (c), such organization incurs an 
                obligation to pay a charitable gift annuity (as 
                defined in section 501(m)) and such 
                organization purchases any annuity contract to 
                fund such obligation, persons receiving 
                payments under the charitable gift annuity 
                shall not be treated for purposes of 
                subparagraph (B) as indirect beneficiaries 
                under such contract if--
                          (i) such organization possesses all 
                        of the incidents of ownership under 
                        such contract,
                          (ii) such organization is entitled to 
                        all the payments under such contract, 
                        and
                          (iii) the timing and amount of 
                        payments under such contract are 
                        substantially the same as the timing 
                        and amount of payments to each such 
                        person under such obligation (as such 
                        obligation is in effect at the time of 
                        such transfer).
                  (E) Exception for certain contracts held by 
                charitable remainder trusts.--A person shall 
                not be treated for purposes of subparagraph (B) 
                as an indirect beneficiary under any life 
                insurance, annuity, or endowment contract held 
                by a charitable remainder annuity trust or a 
                charitable remainder unitrust (as defined in 
                section 664(d)) solely by reason of being 
                entitled to any payment referred to in 
                paragraph (1)(A) or (2)(A) of section 664(d) 
                if--
                          (i) such trust possesses all of the 
                        incidents of ownership under such 
                        contract, and
                          (ii) such trust is entitled to all 
                        the payments under such contract.
                  (F) Excise tax on premiums paid.--
                          (i) In general.--There is hereby 
                        imposed on any organization described 
                        in subsection (c) an excise tax equal 
                        to the premiums paid by such 
                        organization on any life insurance, 
                        annuity, or endowment contract if the 
                        payment of premiums on such contract is 
                        in connection with a transfer for which 
                        a deduction is not allowable under 
                        subparagraph (A), determined without 
                        regard to when such transfer is made.
                          (ii) Payments by other persons.--For 
                        purposes of clause (i), payments made 
                        by any other person pursuant to an 
                        understanding or expectation referred 
                        to in subparagraph (A) shall be treated 
                        as made by the organization.
                          (iii) Reporting.--Any organization on 
                        which tax is imposed by clause (i) with 
                        respect to any premium shall file an 
                        annual return which includes--
                                  (I) the amount of such 
                                premiums paid during the year 
                                and the name and TIN of each 
                                beneficiary under the contract 
                                to which the premium relates, 
                                and
                                  (II) such other information 
                                as the Secretary may require.
                 The penalties applicable to returns required 
                under section 6033 shall apply to returns 
                required under this clause. Returns required 
                under this clause shall be furnished at such 
                time and in such manner as the Secretary shall 
                by forms or regulations require.
                          (iv) Certain rules to apply.--The tax 
                        imposed by this subparagraph shall be 
                        treated as imposed by chapter 42 for 
                        purposes of this title other than 
                        subchapter B of chapter 42.
                  (G) Special rule where State requires 
                specification of charitable gift annuitant in 
                contract.--In the case of an obligation to pay 
                a charitable gift annuity referred to in 
                subparagraph (D) which is entered into under 
                the laws of a State which requires, in order 
                for the charitable gift annuity to be exempt 
                from insurance regulation by such State, that 
                each beneficiary under the charitable gift 
                annuity be named as a beneficiary under an 
                annuity contract issued by an insurance company 
                authorized to transact business in such State, 
                the requirements of clauses (i) and (ii) of 
                subparagraph (D) shall be treated as met if--
                          (i) such State law requirement was in 
                        effect on February 8, 1999,
                          (ii) each such beneficiary under the 
                        charitable gift annuity is a bona fide 
                        resident of such State at the time the 
                        obligation to pay a charitable gift 
                        annuity is entered into, and
                          (iii) the only persons entitled to 
                        payments under such contract are 
                        persons entitled to payments as 
                        beneficiaries under such obligation on 
                        the date such obligation is entered 
                        into.
                  (H) Member of family.--For purposes of this 
                paragraph, an individual's family consists of 
                the individual's grandparents, the grandparents 
                of such individual's spouse, the lineal 
                descendants of such grandparents, and any 
                spouse of such a lineal descendant.
                  (I) Regulations.--The Secretary shall 
                prescribe such regulations as may be necessary 
                or appropriate to carry out the purposes of 
                this paragraph, including regulations to 
                prevent the avoidance of such purposes.
          (11) Qualified appraisal and other documentation for 
        certain contributions.--
                  (A) In general.--
                          (i) Denial of deduction.--In the case 
                        of an individual, partnership, or 
                        corporation, no deduction shall be 
                        allowed under subsection (a) for any 
                        contribution of property for which a 
                        deduction of more than $500 is claimed 
                        unless such person meets the 
                        requirements of subparagraphs (B), (C), 
                        and (D), as the case may be, with 
                        respect to such contribution.
                          (ii) Exceptions.--
                                  (I) Readily valued 
                                property.--Subparagraphs (C) 
                                and (D) shall not apply to 
                                cash, property described in 
                                subsection (e)(1)(B)(iii) or 
                                section 1221(a)(1), publicly 
                                traded securities (as defined 
                                in section 6050L(a)(2)(B)), and 
                                any qualified vehicle described 
                                in paragraph (12)(A)(ii) for 
                                which an acknowledgement under 
                                paragraph (12)(B)(iii) is 
                                provided.
                                  (II) Reasonable cause.--
                                Clause (i) shall not apply if 
                                it is shown that the failure to 
                                meet such requirements is due 
                                to reasonable cause and not to 
                                willful neglect.
                  (B) Property description for contributions of 
                more than $500.--In the case of contributions 
                of property for which a deduction of more than 
                $500 is claimed, the requirements of this 
                subparagraph are met if the individual, 
                partnership or corporation includes with the 
                return for the taxable year in which the 
                contribution is made a description of such 
                property and such other information as the 
                Secretary may require. The requirements of this 
                subparagraph shall not apply to a C corporation 
                which is not a personal service corporation or 
                a closely held C corporation.
                  (C) Qualified appraisal for contributions of 
                more than $5,000.--In the case of contributions 
                of property for which a deduction of more than 
                $5,000 is claimed, the requirements of this 
                subparagraph are met if the individual, 
                partnership, or corporation obtains a qualified 
                appraisal of such property and attaches to the 
                return for the taxable year in which such 
                contribution is made such information regarding 
                such property and such appraisal as the 
                Secretary may require.
                  (D) Substantiation for contributions of more 
                than $500,000.--In the case of contributions of 
                property for which a deduction of more than 
                $500,000 is claimed, the requirements of this 
                subparagraph are met if the individual, 
                partnership, or corporation attaches to the 
                return for the taxable year a qualified 
                appraisal of such property.
                  (E) Qualified appraisal and appraiser.--For 
                purposes of this paragraph--
                          (i) Qualified appraisal.--The term 
                        ``qualified appraisal'' means, with 
                        respect to any property, an appraisal 
                        of such property which--
                                  (I) is treated for purposes 
                                of this paragraph as a 
                                qualified appraisal under 
                                regulations or other guidance 
                                prescribed by the Secretary, 
                                and
                                  (II) is conducted by a 
                                qualified appraiser in 
                                accordance with generally 
                                accepted appraisal standards 
                                and any regulations or other 
                                guidance prescribed under 
                                subclause (I).
                          (ii) Qualified appraiser.--Except as 
                        provided in clause (iii), the term 
                        ``qualified appraiser'' means an 
                        individual who--
                                  (I) has earned an appraisal 
                                designation from a recognized 
                                professional appraiser 
                                organization or has otherwise 
                                met minimum education and 
                                experience requirements set 
                                forth in regulations prescribed 
                                by the Secretary,
                                  (II) regularly performs 
                                appraisals for which the 
                                individual receives 
                                compensation, and
                                  (III) meets such other 
                                requirements as may be 
                                prescribed by the Secretary in 
                                regulations or other guidance.
                          (iii) Specific appraisals.--An 
                        individual shall not be treated as a 
                        qualified appraiser with respect to any 
                        specific appraisal unless--
                                  (I) the individual 
                                demonstrates verifiable 
                                education and experience in 
                                valuing the type of property 
                                subject to the appraisal, and
                                  (II) the individual has not 
                                been prohibited from practicing 
                                before the Internal Revenue 
                                Service by the Secretary under 
                                section 330(c) of title 31, 
                                United States Code, at any time 
                                during the 3-year period ending 
                                on the date of the appraisal.
                  (F) Aggregation of similar items of 
                property.--For purposes of determining 
                thresholds under this paragraph, property and 
                all similar items of property donated to 1 or 
                more donees shall be treated as 1 property.
                  (G) Special rule for pass-thru entities.--In 
                the case of a partnership or S corporation, 
                this paragraph shall be applied at the entity 
                level, except that the deduction shall be 
                denied at the partner or shareholder level.
                  (H) Regulations.--The Secretary may prescribe 
                such regulations as may be necessary or 
                appropriate to carry out the purposes of this 
                paragraph, including regulations that may 
                provide that some or all of the requirements of 
                this paragraph do not apply in appropriate 
                cases.
          (12) Contributions of used motor vehicles, boats, and 
        airplanes.--
                  (A) In general.--In the case of a 
                contribution of a qualified vehicle the claimed 
                value of which exceeds $500--
                          (i) paragraph (8) shall not apply and 
                        no deduction shall be allowed under 
                        subsection (a) for such contribution 
                        unless the taxpayer substantiates the 
                        contribution by a contemporaneous 
                        written acknowledgement of the 
                        contribution by the donee organization 
                        that meets the requirements of 
                        subparagraph (B) and includes the 
                        acknowledgement with the taxpayer's 
                        return of tax which includes the 
                        deduction, and
                          (ii) if the organization sells the 
                        vehicle without any significant 
                        intervening use or material improvement 
                        of such vehicle by the organization, 
                        the amount of the deduction allowed 
                        under subsection (a) shall not exceed 
                        the gross proceeds received from such 
                        sale.
                  (B) Content of acknowledgement.--An 
                acknowledgement meets the requirements of this 
                subparagraph if it includes the following 
                information:
                          (i) The name and taxpayer 
                        identification number of the donor.
                          (ii) The vehicle identification 
                        number or similar number.
                          (iii) In the case of a qualified 
                        vehicle to which subparagraph (A)(ii) 
                        applies--
                                  (I) a certification that the 
                                vehicle was sold in an arm's 
                                length transaction between 
                                unrelated parties,
                                  (II) the gross proceeds from 
                                the sale, and
                                  (III) a statement that the 
                                deductible amount may not 
                                exceed the amount of such gross 
                                proceeds.
                          (iv) In the case of a qualified 
                        vehicle to which subparagraph (A)(ii) 
                        does not apply--
                                  (I) a certification of the 
                                intended use or material 
                                improvement of the vehicle and 
                                the intended duration of such 
                                use, and
                                  (II) a certification that the 
                                vehicle would not be 
                                transferred in exchange for 
                                money, other property, or 
                                services before completion of 
                                such use or improvement.
                          (v) Whether the donee organization 
                        provided any goods or services in 
                        consideration, in whole or in part, for 
                        the qualified vehicle.
                          (vi) A description and good faith 
                        estimate of the value of any goods or 
                        services referred to in clause (v) or, 
                        if such goods or services consist 
                        solely of intangible religious benefits 
                        (as defined in paragraph (8)(B)), a 
                        statement to that effect.
                  (C) Contemporaneous.--For purposes of 
                subparagraph (A), an acknowledgement shall be 
                considered to be contemporaneous if the donee 
                organization provides it within 30 days of--
                          (i) the sale of the qualified 
                        vehicle, or
                          (ii) in the case of an 
                        acknowledgement including a 
                        certification described in subparagraph 
                        (B)(iv), the contribution of the 
                        qualified vehicle.
                  (D) Information to Secretary.--A donee 
                organization required to provide an 
                acknowledgement under this paragraph shall 
                provide to the Secretary the information 
                contained in the acknowledgement. Such 
                information shall be provided at such time and 
                in such manner as the Secretary may prescribe.
                  (E) Qualified vehicle.--For purposes of this 
                paragraph, the term ``qualified vehicle'' means 
                any--
                          (i) motor vehicle manufactured 
                        primarily for use on public streets, 
                        roads, and highways,
                          (ii) boat, or
                          (iii) airplane.
                Such term shall not include any property which 
                is described in section 1221(a)(1).
                  (F) Regulations or other guidance.--The 
                Secretary shall prescribe such regulations or 
                other guidance as may be necessary to carry out 
                the purposes of this paragraph. The Secretary 
                may prescribe regulations or other guidance 
                which exempts sales by the donee organization 
                which are in direct furtherance of such 
                organization's charitable purpose from the 
                requirements of subparagraphs (A)(ii) and 
                (B)(iv)(II).
          (13) Contributions of certain interests in buildings 
        located in registered historic districts.--
                  (A) In general.--No deduction shall be 
                allowed with respect to any contribution 
                described in subparagraph (B) unless the 
                taxpayer includes with the return for the 
                taxable year of the contribution a $500 filing 
                fee.
                  (B) Contribution described.--A contribution 
                is described in this subparagraph if such 
                contribution is a qualified conservation 
                contribution (as defined in subsection (h)) 
                which is a restriction with respect to the 
                exterior of a building described in subsection 
                (h)(4)(C)(ii) and for which a deduction is 
                claimed in excess of $10,000.
                  (C) Dedication of fee.--Any fee collected 
                under this paragraph shall be used for the 
                enforcement of the provisions of subsection 
                (h).
          (14) Reduction for amounts attributable to 
        rehabilitation credit.--In the case of any qualified 
        conservation contribution (as defined in subsection 
        (h)), the amount of the deduction allowed under this 
        section shall be reduced by an amount which bears the 
        same ratio to the fair market value of the contribution 
        as--
                  (A) the sum of the credits allowed to the 
                taxpayer under section 47 for the 5 preceding 
                taxable years with respect to any building 
                which is a part of such contribution, bears to
                  (B) the fair market value of the building on 
                the date of the contribution.
          (15) Special rule for taxidermy property.--
                  (A) Basis.--For purposes of this section and 
                notwithstanding section 1012, in the case of a 
                charitable contribution of taxidermy property 
                which is made by the person who prepared, 
                stuffed, or mounted the property or by any 
                person who paid or incurred the cost of such 
                preparation, stuffing, or mounting, only the 
                cost of the preparing, stuffing, or mounting 
                shall be included in the basis of such 
                property.
                  (B) Taxidermy property.--For purposes of this 
                section, the term ``taxidermy property'' means 
                any work of art which--
                          (i) is the reproduction or 
                        preservation of an animal, in whole or 
                        in part,
                          (ii) is prepared, stuffed, or mounted 
                        for purposes of recreating one or more 
                        characteristics of such animal, and
                          (iii) contains a part of the body of 
                        the dead animal.
          (16) Contributions of clothing and household items.--
                  (A) In general.--In the case of an 
                individual, partnership, or corporation, no 
                deduction shall be allowed under subsection (a) 
                for any contribution of clothing or a household 
                item unless such clothing or household item is 
                in good used condition or better.
                  (B) Items of minimal value.--Notwithstanding 
                subparagraph (A), the Secretary may by 
                regulation deny a deduction under subsection 
                (a) for any contribution of clothing or a 
                household item which has minimal monetary 
                value.
                  (C) Exception for certain property.--
                Subparagraphs (A) and (B) shall not apply to 
                any contribution of a single item of clothing 
                or a household item for which a deduction of 
                more than $500 is claimed if the taxpayer 
                includes with the taxpayer's return a qualified 
                appraisal with respect to the property.
                  (D) Household items.--For purposes of this 
                paragraph--
                          (i) In general.--The term ``household 
                        items'' includes furniture, 
                        furnishings, electronics, appliances, 
                        linens, and other similar items.
                          (ii) Excluded items.--Such term does 
                        not include--
                                  (I) food,
                                  (II) paintings, antiques, and 
                                other objects of art,
                                  (III) jewelry and gems, and
                                  (IV) collections.
                  (E) Special rule for pass-thru entities.--In 
                the case of a partnership or S corporation, 
                this paragraph shall be applied at the entity 
                level, except that the deduction shall be 
                denied at the partner or shareholder level.
          (17) Recordkeeping.--No deduction shall be allowed 
        under subsection (a) for any contribution of a cash, 
        check, or other monetary gift unless the donor 
        maintains as a record of such contribution a bank 
        record or a written communication from the donee 
        showing the name of the donee organization, the date of 
        the contribution, and the amount of the contribution.
          (18) Contributions to donor advised funds.--A 
        deduction otherwise allowed under subsection (a) for 
        any contribution to a donor advised fund (as defined in 
        section 4966(d)(2)) shall only be allowed if--
                  (A) the sponsoring organization (as defined 
                in section 4966(d)(1)) with respect to such 
                donor advised fund is not--
                          (i) described in paragraph (3), (4), 
                        or (5) of subsection (c), or
                          (ii) a type III supporting 
                        organization (as defined in section 
                        4943(f)(5)(A)) which is not a 
                        functionally integrated type III 
                        supporting organization (as defined in 
                        section 4943(f)(5)(B)), and
                  (B) the taxpayer obtains a contemporaneous 
                written acknowledgment (determined under rules 
                similar to the rules of paragraph (8)(C)) from 
                the sponsoring organization (as so defined) of 
                such donor advised fund that such organization 
                has exclusive legal control over the assets 
                contributed.
  (g) Amounts paid to maintain certain students as members of 
taxpayer's household.--
          (1) In general.--Subject to the limitations provided 
        by paragraph (2), amounts paid by the taxpayer to 
        maintain an individual (other than a dependent, as 
        defined in section 152 (determined without regard to 
        subsections (b)(1), (b)(2), and (d)(1)(B) thereof), or 
        a relative of the taxpayer) as a member of his 
        household during the period that such individual is--
                  (A) a member of the taxpayer's household 
                under a written agreement between the taxpayer 
                and an organization described in paragraph (2), 
                (3), or (4) of subsection (c) to implement a 
                program of the organization to provide 
                educational opportunities for pupils or 
                students in private homes, and
                  (B) a full-time pupil or student in the 
                twelfth or any lower grade at an educational 
                organization described in section 
                170(b)(1)(A)(ii) located in the United States,
        shall be treated as amounts paid for the use of the 
        organization.
          (2) Limitations.--
                  (A) Amount.--Paragraph (1) shall apply to 
                amounts paid within the taxable year only to 
                the extent that such amounts do not exceed $50 
                multiplied by the number of full calendar 
                months during the taxable year which fall 
                within the period described in paragraph (1). 
                For purposes of the preceding sentence, if 15 
                or more days of a calendar month fall within 
                such period such month shall be considered as a 
                full calendar month.
                  (B) Compensation or reimbursement.--Paragraph 
                (1) shall not apply to any amount paid by the 
                taxpayer within the taxable year if the 
                taxpayer receives any money or other property 
                as compensation or reimbursement for 
                maintaining the individual in his household 
                during the period described in paragraph (1).
          (3) Relative defined.--For purposes of paragraph (1), 
        the term ``relative of the taxpayer'' means an 
        individual who, with respect to the taxpayer, bears any 
        of the relationships described in subparagraphs (A) 
        through (G) of section 152(d)(2).
          (4) No other amount allowed as deduction.--No 
        deduction shall be allowed under subsection (a) for any 
        amount paid by a taxpayer to maintain an individual as 
        a member of his household under a program described in 
        paragraph (1)(A) except as provided in this subsection.
  (h) Qualified conservation contribution.--
          (1) In general.--For purposes of subsection 
        (f)(3)(B)(iii), the term ``qualified conservation 
        contribution'' means a contribution--
                  (A) of a qualified real property interest,
                  (B) to a qualified organization,
                  (C) exclusively for conservation purposes.
          (2) Qualified real property interest.--For purposes 
        of this subsection, the term ``qualified real property 
        interest'' means any of the following interests in real 
        property:
                  (A) the entire interest of the donor other 
                than a qualified mineral interest,
                  (B) a remainder interest, and
                  (C) a restriction (granted in perpetuity) on 
                the use which may be made of the real property.
          (3) Qualified organization.--For purposes of 
        paragraph (1), the term ``qualified organization'' 
        means an organization which--
                  (A) is described in clause (v) or (vi) of 
                subsection (b)(1)(A), or
                  (B) is described in section 501(c)(3) and--
                          (i) meets the requirements of section 
                        509(a)(2), or
                          (ii) meets the requirements of 
                        section 509(a)(3) and is controlled by 
                        an organization described in 
                        subparagraph (A) or in clause (i) of 
                        this subparagraph.
          (4) Conservation purpose defined.--
                  (A) In general.--For purposes of this 
                subsection, the term ``conservation purpose'' 
                means--
                          (i) the preservation of land areas 
                        for outdoor recreation by, or the 
                        education of, the general public,
                          (ii) the protection of a relatively 
                        natural habitat of fish, wildlife, or 
                        plants, or similar ecosystem,
                          (iii) the preservation of open space 
                        (including farmland and forest land) 
                        where such preservation is--
                                  (I) for the scenic enjoyment 
                                of the general public, or
                                  (II) pursuant to a clearly 
                                delineated Federal, State, or 
                                local governmental conservation 
                                policy,
                 and will yield a significant public benefit, 
                or
                          (iv) the preservation of an 
                        historically important land area or a 
                        certified historic structure.
                  (B) Special rules with respect to buildings 
                in registered historic districts.--In the case 
                of any contribution of a qualified real 
                property interest which is a restriction with 
                respect to the exterior of a building described 
                in subparagraph (C)(ii), such contribution 
                shall not be considered to be exclusively for 
                conservation purposes unless--
                          (i) such interest--
                                  (I) includes a restriction 
                                which preserves the entire 
                                exterior of the building 
                                (including the front, sides, 
                                rear, and height of the 
                                building), and
                                  (II) prohibits any change in 
                                the exterior of the building 
                                which is inconsistent with the 
                                historical character of such 
                                exterior,
                          (ii) the donor and donee enter into a 
                        written agreement certifying, under 
                        penalty of perjury, that the donee--
                                  (I) is a qualified 
                                organization (as defined in 
                                paragraph (3)) with a purpose 
                                of environmental protection, 
                                land conservation, open space 
                                preservation, or historic 
                                preservation, and
                                  (II) has the resources to 
                                manage and enforce the 
                                restriction and a commitment to 
                                do so, and
                          (iii) in the case of any contribution 
                        made in a taxable year beginning after 
                        the date of the enactment of this 
                        subparagraph, the taxpayer includes 
                        with the taxpayer's return for the 
                        taxable year of the contribution--
                                  (I) a qualified appraisal 
                                (within the meaning of 
                                subsection (f)(11)(E)) of the 
                                qualified property interest,
                                  (II) photographs of the 
                                entire exterior of the 
                                building, and
                                  (III) a description of all 
                                restrictions on the development 
                                of the building.
                  (C) Certified historic structure.--For 
                purposes of subparagraph (A)(iv), the term 
                ``certified historic structure'' means--
                          (i) any building, structure, or land 
                        area which is listed in the National 
                        Register, or
                          (ii) any building which is located in 
                        a registered historic district (as 
                        defined in section 47(c)(3)(B)) and is 
                        certified by the Secretary of the 
                        Interior to the Secretary as being of 
                        historic significance to the district.
        A building, structure, or land area satisfies the 
        preceding sentence if it satisfies such sentence either 
        at the time of the transfer or on the due date 
        (including extensions) for filing the transferor's 
        return under this chapter for the taxable year in which 
        the transfer is made.
          (5) Exclusively for conservation purposes.--For 
        purposes of this subsection--
                  (A) Conservation purpose must be protected.--
                A contribution shall not be treated as 
                exclusively for conservation purposes unless 
                the conservation purpose is protected in 
                perpetuity.
                  (B) No surface mining permitted.--
                          (i) In general.--Except as provided 
                        in clause (ii), in the case of a 
                        contribution of any interest where 
                        there is a retention of a qualified 
                        mineral interest, subparagraph (A) 
                        shall not be treated as met if at any 
                        time there may be extraction or removal 
                        of minerals by any surface mining 
                        method.
                          (ii) Special rule.--With respect to 
                        any contribution of property in which 
                        the ownership of the surface estate and 
                        mineral interests has been and remains 
                        separated, subparagraph (A) shall be 
                        treated as met if the probability of 
                        surface mining occurring on such 
                        property is so remote as to be 
                        negligible.
          (6) Qualified mineral interest.--For purposes of this 
        subsection, the term ``qualified mineral interest'' 
        means--
                  (A) subsurface oil, gas, or other minerals, 
                and
                  (B) the right to access to such minerals.
  (i) Standard mileage rate for use of passenger automobile.--
For purposes of computing the deduction under this section for 
use of a passenger automobile, the standard mileage rate shall 
be 14 cents per mile.
  (j) Denial of deduction for certain travel expenses.--No 
deduction shall be allowed under this section for traveling 
expenses (including amounts expended for meals and lodging) 
while away from home, whether paid directly or by 
reimbursement, unless there is no significant element of 
personal pleasure, recreation, or vacation in such travel.
  (l) Treatment of certain amounts paid to or for the benefit 
of institutions of higher education.--
          (1) In general.--No deduction shall be allowed under 
        this section for any amount described in paragraph (2).
          (2) Amount described.--For purposes of paragraph (1), 
        an amount is described in this paragraph if--
                  (A) the amount is paid by the taxpayer to or 
                for the benefit of an educational 
                organization--
                          (i) which is described in subsection 
                        (b)(1)(A)(ii), and
                          (ii) which is an institution of 
                        higher education (as defined in section 
                        3304(f)), and
                  (B) the taxpayer receives (directly or 
                indirectly) as a result of paying such amount 
                the right to purchase tickets for seating at an 
                athletic event in an athletic stadium of such 
                institution.
        If any portion of a payment is for the purchase of such 
        tickets, such portion and the remaining portion (if 
        any) of such payment shall be treated as separate 
        amounts for purposes of this subsection.
  (m) Certain donee income from intellectual property treated 
as an additional charitable contribution.--
          (1) Treatment as additional contribution.--In the 
        case of a taxpayer who makes a qualified intellectual 
        property contribution, the deduction allowed under 
        subsection (a) for each taxable year of the taxpayer 
        ending on or after the date of such contribution shall 
        be increased (subject to the limitations under 
        subsection (b)) by the applicable percentage of 
        qualified donee income with respect to such 
        contribution which is properly allocable to such year 
        under this subsection.
          (2) Reduction in additional deductions to extent of 
        initial deduction.--With respect to any qualified 
        intellectual property contribution, the deduction 
        allowed under subsection (a) shall be increased under 
        paragraph (1) only to the extent that the aggregate 
        amount of such increases with respect to such 
        contribution exceed the amount allowed as a deduction 
        under subsection (a) with respect to such contribution 
        determined without regard to this subsection.
          (3) Qualified donee income.--For purposes of this 
        subsection, the term ``qualified donee income'' means 
        any net income received by or accrued to the donee 
        which is properly allocable to the qualified 
        intellectual property.
          (4) Allocation of qualified donee income to taxable 
        years of donor.--For purposes of this subsection, 
        qualified donee income shall be treated as properly 
        allocable to a taxable year of the donor if such income 
        is received by or accrued to the donee for the taxable 
        year of the donee which ends within or with such 
        taxable year of the donor.
          (5) 10-year limitation.--Income shall not be treated 
        as properly allocable to qualified intellectual 
        property for purposes of this subsection if such income 
        is received by or accrued to the donee after the 10-
        year period beginning on the date of the contribution 
        of such property.
          (6) Benefit limited to life of intellectual 
        property.--Income shall not be treated as properly 
        allocable to qualified intellectual property for 
        purposes of this subsection if such income is received 
        by or accrued to the donee after the expiration of the 
        legal life of such property.
          (7) Applicable percentage.--For purposes of this 
        subsection, the term ``applicable percentage'' means 
        the percentage determined under the following table 
        which corresponds to a taxable year of the donor ending 
        on or after the date of the qualified intellectual 
        property contribution:
          (8) Qualified intellectual property contribution.--
        For purposes of this subsection, the term ``qualified 
        intellectual property contribution'' means any 
        charitable contribution of qualified intellectual 
        property--
                  (A) the amount of which taken into account 
                under this section is reduced by reason of 
                subsection (e)(1), and
                  (B) with respect to which the donor informs 
                the donee at the time of such contribution that 
                the donor intends to treat such contribution as 
                a qualified intellectual property contribution 
                for purposes of this subsection and section 
                6050L.
          (9) Qualified intellectual property.--For purposes of 
        this subsection, the term ``qualified intellectual 
        property'' means property described in subsection 
        (e)(1)(B)(iii) (other than property contributed to or 
        for the use of an organization described in subsection 
        (e)(1)(B)(ii)).
          (10) Other special rules.--
                  (A) Application of limitations on charitable 
                contributions.--Any increase under this 
                subsection of the deduction provided under 
                subsection (a) shall be treated for purposes of 
                subsection (b) as a deduction which is 
                attributable to a charitable contribution to 
                the donee to which such increase relates.
                  (B) Net income determined by donee.--The net 
                income taken into account under paragraph (3) 
                shall not exceed the amount of such income 
                reported under section 6050L(b)(1).
                  (C) Deduction limited to 12 taxable years.--
                Except as may be provided under subparagraph 
                (D)(i), this subsection shall not apply with 
                respect to any qualified intellectual property 
                contribution for any taxable year of the donor 
                after the 12th taxable year of the donor which 
                ends on or after the date of such contribution.
                  (D) Regulations.--The Secretary may issue 
                regulations or other guidance to carry out the 
                purposes of this subsection, including 
                regulations or guidance--
                          (i) modifying the application of this 
                        subsection in the case of a donor or 
                        donee with a short taxable year, and
                          (ii) providing for the determination 
                        of an amount to be treated as net 
                        income of the donee which is properly 
                        allocable to qualified intellectual 
                        property in the case of a donee who 
                        uses such property to further a purpose 
                        or function constituting the basis of 
                        the donee's exemption under section 501 
                        (or, in the case of a governmental 
                        unit, any purpose described in section 
                        170(c)) and does not possess a right to 
                        receive any payment from a third party 
                        with respect to such property.
  (n) Expenses paid by certain whaling captains in support of 
Native Alaskan subsistence whaling.--
          (1) In general.--In the case of an individual who is 
        recognized by the Alaska Eskimo Whaling Commission as a 
        whaling captain charged with the responsibility of 
        maintaining and carrying out sanctioned whaling 
        activities and who engages in such activities during 
        the taxable year, the amount described in paragraph (2) 
        (to the extent such amount does not exceed $10,000 for 
        the taxable year) shall be treated for purposes of this 
        section as a charitable contribution.
          (2) Amount described.--
                  (A) In general.--The amount described in this 
                paragraph is the aggregate of the reasonable 
                and necessary whaling expenses paid by the 
                taxpayer during the taxable year in carrying 
                out sanctioned whaling activities.
                  (B) Whaling expenses.--For purposes of 
                subparagraph (A), the term ``whaling expenses'' 
                includes expenses for--
                          (i) the acquisition and maintenance 
                        of whaling boats, weapons, and gear 
                        used in sanctioned whaling activities,
                          (ii) the supplying of food for the 
                        crew and other provisions for carrying 
                        out such activities, and
                          (iii) storage and distribution of the 
                        catch from such activities.
          (3) Sanctioned whaling activities.--For purposes of 
        this subsection, the term ``sanctioned whaling 
        activities'' means subsistence bowhead whale hunting 
        activities conducted pursuant to the management plan of 
        the Alaska Eskimo Whaling Commission.
          (4) Substantiation of expenses.--The Secretary shall 
        issue guidance requiring that the taxpayer substantiate 
        the whaling expenses for which a deduction is claimed 
        under this subsection, including by maintaining 
        appropriate written records with respect to the time, 
        place, date, amount, and nature of the expense, as well 
        as the taxpayer's eligibility for such deduction, and 
        that (to the extent provided by the Secretary) such 
        substantiation be provided as part of the taxpayer's 
        return of tax.
  (o) Special rules for fractional gifts.--
          (1) Denial of deduction in certain cases.--
                  (A) In general.--No deduction shall be 
                allowed for a contribution of an undivided 
                portion of a taxpayer's entire interest in 
                tangible personal property unless all interests 
                in the property are held immediately before 
                such contribution by--
                          (i) the taxpayer, or
                          (ii) the taxpayer and the donee.
                  (B) Exceptions.--The Secretary may, by 
                regulation, provide for exceptions to 
                subparagraph (A) in cases where all persons who 
                hold an interest in the property make 
                proportional contributions of an undivided 
                portion of the entire interest held by such 
                persons.
          (2) Valuation of subsequent gifts.--In the case of 
        any additional contribution, the fair market value of 
        such contribution shall be determined by using the 
        lesser of--
                  (A) the fair market value of the property at 
                the time of the initial fractional 
                contribution, or
                  (B) the fair market value of the property at 
                the time of the additional contribution.
          (3) Recapture of deduction in certain cases; addition 
        to tax.--
                  (A) Recapture.--The Secretary shall provide 
                for the recapture of the amount of any 
                deduction allowed under this section (plus 
                interest) with respect to any contribution of 
                an undivided portion of a taxpayer's entire 
                interest in tangible personal property--
                          (i) in any case in which the donor 
                        does not contribute all of the 
                        remaining interests in such property to 
                        the donee (or, if such donee is no 
                        longer in existence, to any person 
                        described in section 170(c)) on or 
                        before the earlier of--
                                  (I) the date that is 10 years 
                                after the date of the initial 
                                fractional contribution, or
                                  (II) the date of the death of 
                                the donor, and
                          (ii) in any case in which the donee 
                        has not, during the period beginning on 
                        the date of the initial fractional 
                        contribution and ending on the date 
                        described in clause (i)--
                                  (I) had substantial physical 
                                possession of the property, and
                                  (II) used the property in a 
                                use which is related to a 
                                purpose or function 
                                constituting the basis for the 
                                organizations' exemption under 
                                section 501.
                  (B) Addition to tax.--The tax imposed under 
                this chapter for any taxable year for which 
                there is a recapture under subparagraph (A) 
                shall be increased by 10 percent of the amount 
                so recaptured.
          (4) Definitions.--For purposes of this subsection--
                  (A) Additional contribution.--The term 
                ``additional contribution'' means any 
                charitable contribution by the taxpayer of any 
                interest in property with respect to which the 
                taxpayer has previously made an initial 
                fractional contribution.
                  (B) Initial fractional contribution.--The 
                term ``initial fractional contribution'' means, 
                with respect to any taxpayer, the first 
                charitable contribution of an undivided portion 
                of the taxpayer's entire interest in any 
                tangible personal property.
  (p) Other cross references.--
                  (1) For treatment of certain organizations 
                providing child care, see section 501(k).
                  (2) For charitable contributions of estates 
                and trusts, see section 642(c).
                  (3) For nondeductibility of contributions by 
                common trust funds, see section 584.
                  (4) For charitable contributions of partners, 
                see section 702.
                  (5) For charitable contributions of 
                nonresident aliens, see section 873.
                  (6) For treatment of gifts for benefit of or 
                use in connection with the Naval Academy as 
                gifts to or for use of the United States, see 
                section 8473 of title 10, United States Code.
                  (7) For treatment of gifts accepted by the 
                Secretary of State, the Director of the 
                International Communication Agency, or the 
                Director of the United States International 
                Development Cooperation Agency, as gifts to or 
                for the use of the United States, see section 
                25 of the State Department Basic Authorities 
                Act of 1956.
                  (8) For treatment of gifts of money accepted 
                by the Attorney General for credit to the 
                ``Commissary Funds Federal Prisons'' as gifts 
                to or for the use of the United States, see 
                section 4043 of title 18, United States Code.
                  (9) For charitable contributions to or for 
                the use of Indian tribal governments (or their 
                subdivisions), see section 7871.

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SEC. 179. ELECTION TO EXPENSE CERTAIN DEPRECIABLE BUSINESS ASSETS.

  (a) Treatment as expenses.--A taxpayer may elect to treat the 
cost of any section 179 property as an expense which is not 
chargeable to capital account. Any cost so treated shall be 
allowed as a deduction for the taxable year in which the 
section 179 property is placed in service.
  (b) Limitations.--
          (1) Dollar limitation.--The aggregate cost which may 
        be taken into account under subsection (a) for any 
        taxable year shall not exceed $1,000,000.
          (2) Reduction in limitation.--The limitation under 
        paragraph (1) for any taxable year shall be reduced 
        (but not below zero) by the amount by which the cost of 
        section 179 property placed in service during such 
        taxable year exceeds $2,500,000.
          (3) Limitation based on income from trade or 
        business.--
                  (A) In general.--The amount allowed as a 
                deduction under subsection (a) for any taxable 
                year (determined after the application of 
                paragraphs (1) and (2)) shall not exceed the 
                aggregate amount of taxable income of the 
                taxpayer for such taxable year which is derived 
                from the active conduct by the taxpayer of any 
                trade or business during such taxable year.
                  (B) Carryover of disallowed deduction.--The 
                amount allowable as a deduction under 
                subsection (a) for any taxable year shall be 
                increased by the lesser of--
                          (i) the aggregate amount disallowed 
                        under subparagraph (A) for all prior 
                        taxable years (to the extent not 
                        previously allowed as a deduction by 
                        reason of this subparagraph), or
                          (ii) the excess (if any) of--
                                  (I) the limitation of 
                                paragraphs (1) and (2) (or if 
                                lesser, the aggregate amount of 
                                taxable income referred to in 
                                subparagraph (A)), over
                                  (II) the amount allowable as 
                                a deduction under subsection 
                                (a) for such taxable year 
                                without regard to this 
                                subparagraph.
                  (C) Computation of taxable income.--For 
                purposes of this paragraph, taxable income 
                derived from the conduct of a trade or business 
                shall be computed without regard to the 
                deduction allowable under this section.
          (4) Married individuals filing separately.--In the 
        case of [a husband and wife filing] individuals married 
        to one another who file separate returns for the 
        taxable year--
                  (A) such individuals shall be treated as 1 
                taxpayer for purposes of paragraphs (1) and 
                (2), and
                  (B) unless such individuals elect otherwise, 
                50 percent of the cost which may be taken into 
                account under subsection (a) for such taxable 
                year (before application of paragraph (3)) 
                shall be allocated to each such individual.
          (5) Limitation on cost taken into account for certain 
        passenger vehicles.--
                  (A) In general.--The cost of any sport 
                utility vehicle for any taxable year which may 
                be taken into account under this section shall 
                not exceed $25,000.
                  (B) Sport utility vehicle.--For purposes of 
                subparagraph (A)--
                          (i) In general.--The term ``sport 
                        utility vehicle'' means any 4-wheeled 
                        vehicle--
                                  (I) which is primarily 
                                designed or which can be used 
                                to carry passengers over public 
                                streets, roads, or highways 
                                (except any vehicle operated 
                                exclusively on a rail or 
                                rails),
                                  (II) which is not subject to 
                                section 280F, and
                                  (III) which is rated at not 
                                more than 14,000 pounds gross 
                                vehicle weight.
                          (ii) Certain vehicles excluded.--Such 
                        term does not include any vehicle 
                        which--
                                  (I) is designed to have a 
                                seating capacity of more than 9 
                                persons behind the driver's 
                                seat,
                                  (II) is equipped with a cargo 
                                area of at least 6 feet in 
                                interior length which is an 
                                open area or is designed for 
                                use as an open area but is 
                                enclosed by a cap and is not 
                                readily accessible directly 
                                from the passenger compartment, 
                                or
                                  (III) has an integral 
                                enclosure, fully enclosing the 
                                driver compartment and load 
                                carrying device, does not have 
                                seating rearward of the 
                                driver's seat, and has no body 
                                section protruding more than 30 
                                inches ahead of the leading 
                                edge of the windshield.
          (6) Inflation adjustment.--
                  (A) In general.--In the case of any taxable 
                year beginning after 2018, the dollar amounts 
                in paragraphs (1), (2), and (5)(A) shall each 
                be increased by an amount equal to--
                          (i) such dollar amount, multiplied by
                          (ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for 
                        the calendar year in which the taxable 
                        year begins, determined by substituting 
                        ``calendar year 2017'' for ``calendar 
                        year 2016'' in subparagraph (A)(ii) 
                        thereof.
                  (B) Rounding.--The amount of any increase 
                under subparagraph (A) shall be rounded to the 
                nearest multiple of $10,000 ($100 in the case 
                of any increase in the amount under paragraph 
                (5)(A)).
  (c) Election.--
          (1) In general.--An election under this section for 
        any taxable year shall--
                  (A) specify the items of section 179 property 
                to which the election applies and the portion 
                of the cost of each of such items which is to 
                be taken into account under subsection (a), and
                  (B) be made on the taxpayer's return of the 
                tax imposed by this chapter for the taxable 
                year.
        Such election shall be made in such manner as the 
        Secretary may by regulations prescribe.
          (2) Election.--Any election made under this section, 
        and any specification contained in any such election, 
        may be revoked by the taxpayer with respect to any 
        property, and such revocation, once made, shall be 
        irrevocable.
  (d) Definitions and special rules.--
          (1) Section 179 property.--For purposes of this 
        section, the term ``section 179 property'' means 
        property--
                  (A) which is--
                          (i) tangible property (to which 
                        section 168 applies), or
                          (ii) computer software (as defined in 
                        section 197(e)(3)(B)) which is 
                        described in section 197(e)(3)(A)(i) 
                        and to which section 167 applies,
                  (B) which is--
                          (i) section 1245 property (as defined 
                        in section 1245(a)(3)), or
                          (ii) at the election of the taxpayer, 
                        qualified real property (as defined in 
                        subsection (e)), and
                  (C) which is acquired by purchase for use in 
                the active conduct of a trade or business.
        Such term shall not include any property described in 
        section 50(b) (other than paragraph (2) thereof).
          (2) Purchase defined.--For purposes of paragraph (1), 
        the term ``purchase'' means any acquisition of 
        property, but only if--
                  (A) the property is not acquired from a 
                person whose relationship to the person 
                acquiring it would result in the disallowance 
                of losses under section 267 or 707(b) (but, in 
                applying section 267(b) and (c) for purposes of 
                this section, paragraph (4) of section 267(c) 
                shall be treated as providing that the family 
                of an individual shall include only [his 
                spouse] the individual's spouse, ancestors, and 
                lineal descendants),
                  (B) the property is not acquired by one 
                component member of a controlled group from 
                another component member of the same controlled 
                group, and
                  (C) the basis of the property in the hands of 
                the person acquiring it is not determined--
                          (i) in whole or in part by reference 
                        to the adjusted basis of such property 
                        in the hands of the person from whom 
                        acquired, or
                          (ii) under section 1014(a) (relating 
                        to property acquired from a decedent).
          (3) Cost.--For purposes of this section, the cost of 
        property does not include so much of the basis of such 
        property as is determined by reference to the basis of 
        other property held at any time by the person acquiring 
        such property.
          (4) Section not to apply to estates and trusts.--This 
        section shall not apply to estates and trusts.
          (5) Section not to apply to certain noncorporate 
        lessors.--This section shall not apply to any section 
        179 property which is purchased by a person who is not 
        a corporation and with respect to which such person is 
        the lessor unless--
                  (A) the property subject to the lease has 
                been manufactured or produced by the lessor, or
                  (B) the term of the lease (taking into 
                account options to renew) is less than 50 
                percent of the class life of the property (as 
                defined in section 168(i)(1)), and for the 
                period consisting of the first 12 months after 
                the date on which the property is transferred 
                to the lessee the sum of the deductions with 
                respect to such property which are allowable to 
                the lessor solely by reason of section 162 
                (other than rents and reimbursed amounts with 
                respect to such property) exceeds 15 percent of 
                the rental income produced by such property.
          (6) Dollar limitation of controlled group.--For 
        purposes of subsection (b) of this section--
                  (A) all component members of a controlled 
                group shall be treated as one taxpayer, and
                  (B) the Secretary shall apportion the dollar 
                limitation contained in subsection (b)(1) among 
                the component members of such controlled group 
                in such manner as he shall by regulations 
                prescribe.
          (7) Controlled group defined.--For purposes of 
        paragraphs (2) and (6), the term ``controlled group'' 
        has the meaning assigned to it by section 1563(a), 
        except that, for such purposes, the phrase ``more than 
        50 percent'' shall be substituted for the phrase ``at 
        least 80 percent'' each place it appears in section 
        1563(a)(1).
          (8) Treatment of partnerships and S corporations.--In 
        the case of a partnership, the limitations of 
        subsection (b) shall apply with respect to the 
        partnership and with respect to each partner. A similar 
        rule shall apply in the case of an S corporation and 
        its shareholders.
          (9) Coordination with section 38.--No credit shall be 
        allowed under section 38 with respect to any amount for 
        which a deduction is allowed under subsection (a).
          (10) Recapture in certain cases.--The Secretary 
        shall, by regulations, provide for recapturing the 
        benefit under any deduction allowable under subsection 
        (a) with respect to any property which is not used 
        predominantly in a trade or business at any time.
  (e) Qualified real property.--For purposes of this section, 
the term ``qualified real property'' means--
          (1) any qualified improvement property described in 
        section 168(e)(6), and
          (2) any of the following improvements to 
        nonresidential real property placed in service after 
        the date such property was first placed in service:
                  (A) Roofs.
                  (B) Heating, ventilation, and air-
                conditioning property.
                  (C) Fire protection and alarm systems.
                  (D) Security systems.

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PART VII--ADDITIONAL ITEMIZED DEDUCTIONS FOR INDIVIDUALS

           *       *       *       *       *       *       *


SEC. 213. MEDICAL, DENTAL, ETC., EXPENSES.

  (a) Allowance of deduction.--There shall be allowed as a 
deduction the expenses paid during the taxable year, not 
compensated for by insurance or otherwise, for medical care of 
the taxpayer, [his spouse] the taxpayer's spouse, or a 
dependent (as defined in section 152, determined without regard 
to subsections (b)(1), (b)(2), and (d)(1)(B) thereof), to the 
extent that such expenses exceed 10 percent of adjusted gross 
income.
  (b) Limitation with respect to medicine and drugs.--An amount 
paid during the taxable year for medicine or a drug shall be 
taken into account under subsection (a) only if such medicine 
or drug is a prescribed drug or is insulin.
  (c) Special rule for decedents.--
          (1) Treatment of expenses paid after death.--For 
        purposes of subsection (a), expenses for the medical 
        care of the taxpayer which are paid out of [his estate] 
        the estate of the taxpayer during the 1-year period 
        beginning with the day after the date of [his death] 
        the death of the taxpayer shall be treated as paid by 
        the taxpayer at the time incurred.
          (2) Limitation.--Paragraph (1) shall not apply if the 
        amount paid is allowable under section 2053 as a 
        deduction in computing the taxable estate of the 
        decedent, but this paragraph shall not apply if (within 
        the time and in the manner and form prescribed by the 
        Secretary) there is filed--
                  (A) a statement that such amount has not been 
                allowed as a deduction under section 2053, and
                  (B) a waiver of the right to have such amount 
                allowed at any time as a deduction under 
                section 2053.
  (d) Definitions.--For purposes of this section--
          (1) The term ``medical care'' means amounts paid--
                  (A) for the diagnosis, cure, mitigation, 
                treatment, or prevention of disease, or for the 
                purpose of affecting any structure or function 
                of the body,
                  (B) for transportation primarily for and 
                essential to medical care referred to in 
                subparagraph (A),
                  (C) for qualified long-term care services (as 
                defined in section 7702B(c)), or
                  (D) for insurance (including amounts paid as 
                premiums under part B of title XVIII of the 
                Social Security Act, relating to supplementary 
                medical insurance for the aged) covering 
                medical care referred to in subparagraphs (A) 
                and (B) or for any qualified long-term care 
                insurance contract (as defined in section 
                7702B(b)).
        In the case of a qualified long-term care insurance 
        contract (as defined in section 7702B(b)), only 
        eligible long-term care premiums (as defined in 
        paragraph (10)) shall be taken into account under 
        subparagraph (D).
          (2) Amounts paid for certain lodging away from home 
        treated as paid for medical care.--Amounts paid for 
        lodging (not lavish or extravagant under the 
        circumstances) while away from home primarily for and 
        essential to medical care referred to in paragraph 
        (1)(A) shall be treated as amounts paid for medical 
        care if--
                  (A) the medical care referred to in paragraph 
                (1)(A) is provided by a physician in a licensed 
                hospital (or in a medical care facility which 
                is related to, or the equivalent of, a licensed 
                hospital), and
                  (B) there is no significant element of 
                personal pleasure, recreation, or vacation in 
                the travel away from home.
        The amount taken into account under the preceding 
        sentence shall not exceed $50 for each night for each 
        individual.
          (3) Prescribed drug.--The term ``prescribed drug'' 
        means a drug or biological which requires a 
        prescription of a physician for its use by an 
        individual.
          (4) Physician.--The term ``physician'' has the 
        meaning given to such term by section 1861(r) of the 
        Social Security Act (42 U.S.C. 1395x(r)).
          (5) Special rule in the case of child of divorced 
        parents, etc.--Any child to whom section 152(e) applies 
        shall be treated as a dependent of both parents for 
        purposes of this section.
          (6) In the case of an insurance contract under which 
        amounts are payable for other than medical care 
        referred to in subparagraphs (A), (B), and (C) of 
        paragraph (1)--
                  (A) no amount shall be treated as paid for 
                insurance to which paragraph (1)(D) applies 
                unless the charge for such insurance is either 
                separately stated in the contract, or furnished 
                to the policyholder by the insurance company in 
                a separate statement,
                  (B) the amount taken into account as the 
                amount paid for such insurance shall not exceed 
                such charge, and
                  (C) no amount shall be treated as paid for 
                such insurance if the amount specified in the 
                contract (or furnished to the policyholder by 
                the insurance company in a separate statement) 
                as the charge for such insurance is 
                unreasonably large in relation to the total 
                charges under the contract.
          (7) Subject to the limitations of paragraph (6), 
        premiums paid during the taxable year by a taxpayer 
        before [he] the taxpayer attains the age of 65 for 
        insurance covering medical care (within the meaning of 
        subparagraphs (A), (B), and (C) of paragraph (1)) for 
        the taxpayer, [his spouse] the taxpayer's spouse, or a 
        dependent after the taxpayer attains the age of 65 
        shall be treated as expenses paid during the taxable 
        year for insurance which constitutes medical care if 
        premiums for such insurance are payable (on a level 
        payment basis) under the contract for a period of 10 
        years or more or until the year in which the taxpayer 
        attains the age of 65 (but in no case for a period of 
        less than 5 years).
          (8) The determination of whether an individual is 
        married at any time during the taxable year shall be 
        made in accordance with the provisions of section 
        6013(d) (relating to determination of [status as 
        husband and wife] marital status).
          (9) Cosmetic surgery.--
                  (A) In general.--The term ``medical care'' 
                does not include cosmetic surgery or other 
                similar procedures, unless the surgery or 
                procedure is necessary to ameliorate a 
                deformity arising from, or directly related to, 
                a congenital abnormality, a personal injury 
                resulting from an accident or trauma, or 
                disfiguring disease.
                  (B) Cosmetic surgery defined.--For purposes 
                of this paragraph, the term ``cosmetic 
                surgery'' means any procedure which is directed 
                at improving the patient's appearance and does 
                not meaningfully promote the proper function of 
                the body or prevent or treat illness or 
                disease.
          (10) Eligible long-term care premiums.--
                  (A) In general.--For purposes of this 
                section, the term ``eligible long-term care 
                premiums'' means the amount paid during a 
                taxable year for any qualified long-term care 
                insurance contract (as defined in section 
                7702B(b)) covering an individual, to the extent 
                such amount does not exceed the limitation 
                determined under the following table:
                  (B) Indexing.--
                          (i) In general.--In the case of any 
                        taxable year beginning in a calendar 
                        year after 1997, each dollar amount 
                        contained in subparagraph (A) shall be 
                        increased by the medical care cost 
                        adjustment of such amount for such 
                        calendar year. If any increase 
                        determined under the preceding sentence 
                        is not a multiple of $10, such increase 
                        shall be rounded to the nearest 
                        multiple of $10.
                          (ii) Medical care cost adjustment.--
                        For purposes of clause (i), the medical 
                        care cost adjustment for any calendar 
                        year is the percentage (if any) by 
                        which--
                                  (I) the medical care 
                                component of the C-CPI-U (as 
                                defined in section 1(f)(6)) for 
                                August of the preceding 
                                calendar year, exceeds
                                  (II) such component of the 
                                CPI (as defined in section 
                                1(f)(4)) for August of 1996, 
                                multiplied by the amount 
                                determined under section 
                                1(f)(3)(B).
                 The Secretary shall, in consultation with the 
                Secretary of Health and Human Services, 
                prescribe an adjustment which the Secretary 
                determines is more appropriate for purposes of 
                this paragraph than the adjustment described in 
                the preceding sentence, and the adjustment so 
                prescribed shall apply in lieu of the 
                adjustment described in the preceding sentence.
          (11) Certain payments to relatives treated as not 
        paid for medical care.--An amount paid for a qualified 
        long-term care service (as defined in section 7702B(c)) 
        provided to an individual shall be treated as not paid 
        for medical care if such service is provided--
                  (A) by the spouse of the individual or by a 
                relative (directly or through a partnership, 
                corporation, or other entity) unless the 
                service is provided by a licensed professional 
                with respect to such service, or
                  (B) by a corporation or partnership which is 
                related (within the meaning of section 267(b) 
                or 707(b)) to the individual.
        For purposes of this paragraph, the term ``relative'' 
        means an individual bearing a relationship to the 
        individual which is described in any of subparagraphs 
        (A) through (G) of section 152(d)(2). This paragraph 
        shall not apply for purposes of section 105(b) with 
        respect to reimbursements through insurance.
  (e) Exclusion of amounts allowed for care of certain 
dependents.--Any expense allowed as a credit under section 21 
shall not be treated as an expense paid for medical care.
  (f) Special rules for 2013 through 2018.--In the case of any 
taxable year--
          (1) beginning after December 31, 2012, and ending 
        before January 1, 2017, in the case of a taxpayer if 
        such taxpayer or such taxpayer's spouse has attained 
        age 65 before the close of such taxable year, and
          (2) beginning after December 31, 2016, and ending 
        before January 1, 2019, in the case of any taxpayer,
subsection (a) shall be applied with respect to a taxpayer by 
substituting ``7.5 percent'' for ``10 percent''.

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SEC. 217. MOVING EXPENSES.

  (a) Deduction allowed.--There shall be allowed as a deduction 
moving expenses paid or incurred during the taxable year in 
connection with the commencement of work by the taxpayer as an 
employee or as a self-employed individual at a new principal 
place of work.
  (b) Definition of moving expenses.--
          (1) In general.--For purposes of this section, the 
        term ``moving expenses'' means only the reasonable 
        expenses--
                  (A) of moving household goods and personal 
                effects from the former residence to the new 
                residence, and
                  (B) of traveling (including lodging) from the 
                former residence to the new place of residence.
        Such term shall not include any expenses for meals.
          (2) Individuals other than taxpayer.--In the case of 
        any individual other than the taxpayer, expenses 
        referred to in paragraph (1) shall be taken into 
        account only if such individual has both the former 
        residence and the new residence as his principal place 
        of abode and is a member of the taxpayer's household.
  (c) Conditions for allowance.--No deduction shall be allowed 
under this section unless--
          (1) the taxpayer's new principal place of work--
                  (A) is at least 50 miles farther from his 
                former residence than was his former principal 
                place of work, or
                  (B) if he had no former principal place of 
                work, is at least 50 miles from his former 
                residence, and
          (2) either--
                  (A) during the 12-month period immediately 
                following his arrival in the general location 
                of his new principal place of work, the 
                taxpayer is a full-time employee, in such 
                general location, during at least 39 weeks, or
                  (B) during the 24-month period immediately 
                following his arrival in the general location 
                of his new principal place of work, the 
                taxpayer is a full-time employee or performs 
                services as a self-employed individual on a 
                full-time basis, in such general location, 
                during at least 78 weeks, of which not less 
                than 39 weeks are during the 12-month period 
                referred to in subparagraph (A).
        For purposes of paragraph (1), the distance between two 
        points shall be the shortest of the more commonly 
        traveled routes between such two points.
  (d) Rules for application of subsection (c)(2).--
          (1) The condition of subsection (c)(2) shall not 
        apply if the taxpayer is unable to satisfy such 
        condition by reason of--
                  (A) death or disability, or
                  (B) involuntary separation (other than for 
                willful misconduct) from the service of, or 
                transfer for the benefit of, an employer after 
                obtaining full-time employment in which the 
                taxpayer could reasonably have been expected to 
                satisfy such condition.
          (2) If a taxpayer has not satisfied the condition of 
        subsection (c)(2) before the time prescribed by law 
        (including extensions thereof) for filing the return 
        for the taxable year during which he paid or incurred 
        moving expenses which would otherwise be deductible 
        under this section, but may still satisfy such 
        condition, then such expenses may (at the election of 
        the taxpayer) be deducted for such taxable year 
        notwithstanding subsection (c)(2).
          (3) If--
                  (A) for any taxable year moving expenses have 
                been deducted in accordance with the rule 
                provided in paragraph (2), and
                  (B) the condition of subsection (c)(2) cannot 
                be satisfied at the close of a subsequent 
                taxable year,
        then an amount equal to the expenses which were so 
        deducted shall be included in gross income for the 
        first such subsequent taxable year.
  (f) Self-employed individual.--For purposes of this section, 
the term ``self-employed individual'' means an individual who 
performs personal services--
          (1) as the owner of the entire interest in an 
        unincorporated trade or business, or
          (2) as a partner in a partnership carrying on a trade 
        or business.
  (g) Rules for members of the Armed Forces of the United 
States.--In the case of a member of the Armed Forces of the 
United States on active duty who moves pursuant to a military 
order and incident to a permanent change of station--
          (1) the limitations under subsection (c) shall not 
        apply;
          (2) any moving and storage expenses which are 
        furnished in kind (or for which reimbursement or an 
        allowance is provided, but only to the extent of the 
        expenses paid or incurred) to such member[, his spouse, 
        or his dependents] or the spouse or dependents of such 
        member, shall not be includible in gross income, and no 
        reporting with respect to such expenses shall be 
        required by the Secretary of Defense or the Secretary 
        of Transportation, as the case may be; and
          (3) if moving and storage expenses are furnished in 
        kind (or if reimbursement or an allowance for such 
        expenses is provided) to such member's spouse and [his 
        dependents] dependents with regard to moving to a 
        location other than the one to which such member moves 
        (or from a location other than the one from which such 
        member moves), this section shall apply with respect to 
        the moving expenses of [his spouse] the member's spouse 
        and dependents--
                  (A) as if [his spouse] the member's spouse 
                commenced work as an employee at a new 
                principal place of work at such location; and
                  (B) without regard to the limitations under 
                subsection (c).
  (h) Special rules for foreign moves.--
          (1) Allowance of certain storage fees.--In the case 
        of a foreign move, for purposes of this section, the 
        moving expenses described in subsection (b)(1)(A) 
        include the reasonable expenses--
                  (A) of moving household goods and personal 
                effects to and from storage, and
                  (B) of storing such goods and effects for 
                part or all of the period during which the new 
                place of work continues to be the taxpayer's 
                principal place of work.
          (2) Foreign move.--For purposes of this subsection, 
        the term ``foreign move'' means the commencement of 
        work by the taxpayer at a new principal place of work 
        located outside the United States.
          (3) United States defined.--For purposes of this 
        subsection and subsection (i), the term ``United 
        States'' includes the possessions of the United States.
  (i) Allowance of deductions in case of retirees or decedents 
who were working abroad.--
          (1) In general.--In the case of any qualified retiree 
        moving expenses or qualified survivor moving expenses--
                  (A) this section (other than subsection (h)) 
                shall be applied with respect to such expenses 
                as if they were incurred in connection with the 
                commencement of work by the taxpayer as an 
                employee at a new principal place of work 
                located within the United States, and
                  (B) the limitations of subsection (c)(2) 
                shall not apply.
          (2) Qualified retiree moving expenses.--For purposes 
        of paragraph (1), the term ``qualified retiree moving 
        expenses'' means any moving expenses--
                  (A) which are incurred by an individual whose 
                former principal place of work and former 
                residence were outside the United States, and
                  (B) which are incurred for a move to a new 
                residence in the United States in connection 
                with the bona fide retirement of the 
                individual.
          (3) Qualified survivor moving expenses.--For purposes 
        of paragraph (1), the term ``qualified survivor moving 
        expenses'' means moving expenses--
                  (A) which are paid or incurred by the spouse 
                or any dependent of any decedent who (as of the 
                time of [his] death) had a principal place of 
                work outside the United States, and
                  (B) which are incurred for a move which 
                begins within 6 months after the death of such 
                decedent and which is to a residence in the 
                United States from a former residence outside 
                the United States which (as of the time of the 
                decedent's death) was the residence of such 
                decedent and the individual paying or incurring 
                the expense.
  (j) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary to carry out the purposes of 
this section.
  (k) Suspension of deduction for taxable years 2018 through 
2025.--Except in the case of an individual to whom subsection 
(g) applies, this section shall not apply to any taxable year 
beginning after December 31, 2017, and before January 1, 2026.

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SEC. 219. RETIREMENT SAVINGS.

  (a) Allowance of deduction.--In the case of an individual, 
there shall be allowed as a deduction an amount equal to the 
qualified retirement contributions of the individual for the 
taxable year.
  (b) Maximum amount of deduction.--
          (1) In general.--The amount allowable as a deduction 
        under subsection (a) to any individual for any taxable 
        year shall not exceed the lesser of--
                  (A) the deductible amount, or
                  (B) an amount equal to the compensation 
                includible in the individual's gross income for 
                such taxable year.
          (2) Special rule for employer contributions under 
        simplified employee pensions.--This section shall not 
        apply with respect to an employer contribution to a 
        simplified employee pension.
          (3) Plans under section 501(c)(18).--Notwithstanding 
        paragraph (1), the amount allowable as a deduction 
        under subsection (a) with respect to any contributions 
        on behalf of an employee to a plan described in section 
        501(c)(18) shall not exceed the lesser of--
                  (A) $7,000, or
                  (B) an amount equal to 25 percent of the 
                compensation (as defined in section 415(c)(3)) 
                includible in the individual's gross income for 
                such taxable year.
          (4) Special rule for simple retirement accounts.--
        This section shall not apply with respect to any amount 
        contributed to a simple retirement account established 
        under section 408(p).
          (5) Deductible amount.--For purposes of paragraph 
        (1)(A)--
                  (A) In general.--The deductible amount is 
                $5,000.
                  (B) Catch-up contributions for individuals 50 
                or older.--
                          (i) In general.--In the case of an 
                        individual who has attained the age of 
                        50 before the close of the taxable 
                        year, the deductible amount for such 
                        taxable year shall be increased by the 
                        applicable amount.
                          (ii) Applicable amount.--For purposes 
                        of clause (i), the applicable amount is 
                        $1,000.
                  (C) Cost-of-living adjustment.--
                          (i) In general.--In the case of any 
                        taxable year beginning in a calendar 
                        year after 2008, the $5,000 amount 
                        under subparagraph (A) shall be 
                        increased by an amount equal to--
                                  (I) such dollar amount, 
                                multiplied by
                                  (II) the cost-of-living 
                                adjustment determined under 
                                section 1(f)(3) for the 
                                calendar year in which the 
                                taxable year begins, determined 
                                by substituting ``calendar year 
                                2007'' for ``calendar year 
                                2016'' in subparagraph (A)(ii) 
                                thereof.
                          (ii) Rounding rules.--If any amount 
                        after adjustment under clause (i) is 
                        not a multiple of $500, such amount 
                        shall be rounded to the next lower 
                        multiple of $500.
  (c) Kay Bailey Hutchison Spousal IRA.--
          (1) In general.--In the case of an individual to whom 
        this paragraph applies for the taxable year, the 
        limitation of paragraph (1) of subsection (b) shall be 
        equal to the lesser of--
                  (A) the dollar amount in effect under 
                subsection (b)(1)(A) for the taxable year, or
                  (B) the sum of--
                          (i) the compensation includible in 
                        such individual's gross income for the 
                        taxable year, plus
                          (ii) the compensation includible in 
                        the gross income of such individual's 
                        spouse for the taxable year reduced 
                        by--
                                  (I) the amount allowed as a 
                                deduction under subsection (a) 
                                to such spouse for such taxable 
                                year,
                                  (II) the amount of any 
                                designated nondeductible 
                                contribution (as defined in 
                                section 408(o)) on behalf of 
                                such spouse for such taxable 
                                year, and
                                  (III) the amount of any 
                                contribution on behalf of such 
                                spouse to a Roth IRA under 
                                section 408A for such taxable 
                                year.
          (2) Individuals to whom paragraph (1) applies.--
        Paragraph (1) shall apply to any individual if--
                  (A) such individual files a joint return for 
                the taxable year, and
                  (B) the amount of compensation (if any) 
                includible in such individual's gross income 
                for the taxable year is less than the 
                compensation includible in the gross income of 
                such individual's spouse for the taxable year.
  (d) Other limitations and restrictions.--
          (1) Beneficiary must be under age 701/2.--No 
        deduction shall be allowed under this section with 
        respect to any qualified retirement contribution for 
        the benefit of an individual if such individual has 
        attained age 701/2 before the close of such 
        individual's taxable year for which the contribution 
        was made.
          (2) Recontributed amounts.--No deduction shall be 
        allowed under this section with respect to a rollover 
        contribution described in section 402(c), 403(a)(4), 
        403(b)(8), 408(d)(3), or 457(e)(16).
          (3) Amounts contributed under endowment contract.--In 
        the case of an endowment contract described in section 
        408(b), no deduction shall be allowed under this 
        section for that portion of the amounts paid under the 
        contract for the taxable year which is properly 
        allocable, under regulations prescribed by the 
        Secretary, to the cost of life insurance.
          (4) Denial of deduction for amount contributed to 
        inherited annuities or accounts.--No deduction shall be 
        allowed under this section with respect to any amount 
        paid to an inherited individual retirement account or 
        individual retirement annuity (within the meaning of 
        section 408(d)(3)(C)(ii)).
  (e) Qualified retirement contribution.--For purposes of this 
section, the term ``qualified retirement contribution'' means--
          (1) any amount paid in cash for the taxable year by 
        or on behalf of an individual to an individual 
        retirement plan for such individual's benefit, and
          (2) any amount contributed on behalf of any 
        individual to a plan described in section 501(c)(18).
  (f) Other definitions and special rules.--
          (1) Compensation.--For purposes of this section, the 
        term ``compensation'' includes earned income (as 
        defined in section 401(c)(2)). The term 
        ``compensation'' does not include any amount received 
        as a pension or annuity and does not include any amount 
        received as deferred compensation. For purposes of this 
        paragraph, section 401(c)(2) shall be applied as if the 
        term trade or business for purposes of section 1402 
        included service described in subsection (c)(6). The 
        term ``compensation'' includes any differential wage 
        payment (as defined in section 3401(h)(2)).
          (2) Married individuals.--The maximum deduction under 
        subsection (b) shall be computed separately for each 
        individual, and this section shall be applied without 
        regard to any community property laws.
          (3) Time when contributions deemed made.--For 
        purposes of this section, a taxpayer shall be deemed to 
        have made a contribution to an individual retirement 
        plan on the last day of the preceding taxable year if 
        the contribution is made on account of such taxable 
        year and is made not later than the time prescribed by 
        law for filing the return for such taxable year (not 
        including extensions thereof).
          (5) Employer payments.--For purposes of this title, 
        any amount paid by an employer to an individual 
        retirement plan shall be treated as payment of 
        compensation to the employee (other than a self-
        employed individual who is an employee within the 
        meaning of section 401(c)(1)) includible in his gross 
        income in the taxable year for which the amount was 
        contributed, whether or not a deduction for such 
        payment is allowable under this section to the 
        employee.
          (6) Excess contributions treated as contribution made 
        during subsequent year for which there is an unused 
        limitation.--
                  (A) In general.--If for the taxable year the 
                maximum amount allowable as a deduction under 
                this section for contributions to an individual 
                retirement plan exceeds the amount contributed, 
                then the taxpayer shall be treated as having 
                made an additional contribution for the taxable 
                year in an amount equal to the lesser of--
                          (i) the amount of such excess, or
                          (ii) the amount of the excess 
                        contributions for such taxable year 
                        (determined under section 4973(b)(2) 
                        without regard to subparagraph (C) 
                        thereof).
                  (B) Amount contributed.--For purposes of this 
                paragraph, the amount contributed--
                          (i) shall be determined without 
                        regard to this paragraph, and
                          (ii) shall not include any rollover 
                        contribution.
                  (C) Special rule where excess deduction was 
                allowed for closed year.--Proper reduction 
                shall be made in the amount allowable as a 
                deduction by reason of this paragraph for any 
                amount allowed as a deduction under this 
                section for a prior taxable year for which the 
                period for assessing deficiency has expired if 
                the amount so allowed exceeds the amount which 
                should have been allowed for such prior taxable 
                year.
          (7) Special rule for compensation earned by members 
        of the Armed Forces for service in a combat zone..--For 
        purposes of subsections (b)(1)(B) and (c), the amount 
        of compensation includible in an individual's gross 
        income shall be determined without regard to section 
        112.
          (8) Election not to deduct contributions.--For 
        election not to deduct contributions to individual 
        retirement plans, see section 408(o)(2)(B)(ii).
  (g) Limitation on deduction for active participants in 
certain pension plans.--
          (1) In general.--If (for any part of any plan year 
        ending with or within a taxable year) an individual or 
        the individual's spouse is an active participant, each 
        of the dollar limitations contained in subsections 
        (b)(1)(A) and (c)(1)(A) for such taxable year shall be 
        reduced (but not below zero) by the amount determined 
        under paragraph (2).
          (2) Amount of reduction.--
                  (A) In general.--The amount determined under 
                this paragraph with respect to any dollar 
                limitation shall be the amount which bears the 
                same ratio to such limitation as--
                          (i) the excess of--
                                  (I) the taxpayer's adjusted 
                                gross income for such taxable 
                                year, over
                                  (II) the applicable dollar 
                                amount, bears to
                          (ii) $10,000 ($20,000 in the case of 
                        a joint return).
                  (B) No reduction below $200 until complete 
                phase-out.--No dollar limitation shall be 
                reduced below $200 under paragraph (1) unless 
                (without regard to this subparagraph) such 
                limitation is reduced to zero.
                  (C) Rounding.--Any amount determined under 
                this paragraph which is not a multiple of $10 
                shall be rounded to the next lowest $10.
          (3) Adjusted gross income; applicable dollar 
        amount.--For purposes of this subsection--
                  (A) Adjusted gross income.--Adjusted gross 
                income of any taxpayer shall be determined--
                          (i) after application of sections 86 
                        and 469, and
                          (ii) without regard to sections 135, 
                        137, 221, 222, and 911 or the deduction 
                        allowable under this section.
                  (B) Applicable dollar amount.--The term 
                ``applicable dollar amount'' means the 
                following:
                          (i) In the case of a taxpayer filing 
                        a joint return, $80,000.
                          (ii) In the case of any other 
                        taxpayer (other than a married 
                        individual filing a separate return), 
                        $50,000.
                          (iii) In the case of a married 
                        individual filing a separate return, 
                        zero.
          (4) Special rule for married individuals filing 
        separately and living apart.-- [A husband and wife] 
        Married individuals who--
                  (A) file separate returns for any taxable 
                year, and
                  (B) live apart at all times during such 
                taxable year,
        shall not be treated as married individuals for 
        purposes of this subsection.
          (5) Active participant.--For purposes of this 
        subsection, the term ``active participant'' means, with 
        respect to any plan year, an individual--
                  (A) who is an active participant in--
                          (i) a plan described in section 
                        401(a) which includes a trust exempt 
                        from tax under section 501(a),
                          (ii) an annuity plan described in 
                        section 403(a),
                          (iii) a plan established for its 
                        employees by the United States, by a 
                        State or political subdivision thereof, 
                        or by an agency or instrumentality of 
                        any of the foregoing,
                          (iv) an annuity contract described in 
                        section 403(b),
                          (v) a simplified employee pension 
                        (within the meaning of section 408(k)), 
                        or
                          (vi) any simple retirement account 
                        (within the meaning of section 408(p)), 
                        or
                  (B) who makes deductible contributions to a 
                trust described in section 501(c)(18).
        The determination of whether an individual is an active 
        participant shall be made without regard to whether or 
        not such individual's rights under a plan, trust, or 
        contract are nonforfeitable. An eligible deferred 
        compensation plan (within the meaning of section 
        457(b)) shall not be treated as a plan described in 
        subparagraph (A)(iii).
          (6) Certain individuals not treated as active 
        participants.--For purposes of this subsection, any 
        individual described in any of the following 
        subparagraphs shall not be treated as an active 
        participant for any taxable year solely because of any 
        participation so described:
                  (A) Members of reserve components.--
                Participation in a plan described in 
                subparagraph (A)(iii) of paragraph (5) by 
                reason of service as a member of a reserve 
                component of the Armed Forces (as defined in 
                section 10101 of title 10), unless such 
                individual has served in excess of 90 days on 
                active duty (other than active duty for 
                training) during the year.
                  (B) Volunteer firefighters.--A volunteer 
                firefighter--
                          (i) who is a participant in a plan 
                        described in subparagraph (A)(iii) of 
                        paragraph (5) based on his activity as 
                        a volunteer firefighter, and
                          (ii) whose accrued benefit as of the 
                        beginning of the taxable year is not 
                        more than an annual benefit of $1,800 
                        (when expressed as a single life 
                        annuity commencing at age 65).
          (7) Special rule for spouses who are not active 
        participants.--If this subsection applies to an 
        individual for any taxable year solely because their 
        spouse is an active participant, then, in applying this 
        subsection to the individual (but not their spouse)--
                  (A) the applicable dollar amount under 
                paragraph (3)(B)(i) shall be $150,000; and
                  (B) the amount applicable under paragraph 
                (2)(A)(ii) shall be $10,000.
          (8) Inflation adjustment.--In the case of any taxable 
        year beginning in a calendar year after 2006, each of 
        the dollar amounts in paragraphs (3)(B)(i), (3)(B)(ii), 
        and (7)(A) shall be be increased by an amount equal 
        to--
                  (A) such dollar amount, multiplied by
                  (B) the cost-of-living adjustment determined 
                under section 1(f)(3) for the calendar year in 
                which the taxable year begins, determined by 
                substituting ``calendar year 2005'' for 
                ``calendar year 2016'' in subparagraph (A)(ii) 
                thereof.
        Any increase determined under the preceding sentence 
        shall be rounded to the nearest multiple of $1,000.

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PART IX--ITEMS NOT DEDUCTIBLE

           *       *       *       *       *       *       *


SEC. 267. LOSSES, EXPENSES, AND INTEREST WITH RESPECT TO TRANSACTIONS 
                    BETWEEN RELATED TAXPAYERS.

  (a) In general.--
          (1) Deduction for losses disallowed.--No deduction 
        shall be allowed in respect of any loss from the sale 
        or exchange of property, directly or indirectly, 
        between persons specified in any of the paragraphs of 
        subsection (b). The preceding sentence shall not apply 
        to any loss of the distributing corporation (or the 
        distributee) in the case of a distribution in complete 
        liquidation.
          (2) Matching of deduction and payee income item in 
        the case of expenses and interest.--If--
                  (A) by reason of the method of accounting of 
                the person to whom the payment is to be made, 
                the amount thereof is not (unless paid) 
                includible in the gross income of such person, 
                and
                  (B) at the close of the taxable year of the 
                taxpayer for which (but for this paragraph) the 
                amount would be deductible under this chapter, 
                both the taxpayer and the person to whom the 
                payment is to be made are persons specified in 
                any of the paragraphs of subsection (b),
        then any deduction allowable under this chapter in 
        respect of such amount shall be allowable as of the day 
        as of which such amount is includible in the gross 
        income of the person to whom the payment is made (or, 
        if later, as of the day on which it would be so 
        allowable but for this paragraph). For purposes of this 
        paragraph, in the case of a personal service 
        corporation (within the meaning of section 441(i)(2)), 
        such corporation and any employee-owner (within the 
        meaning of section 269A(b)(2), as modified by section 
        441(i)(2)) shall be treated as persons specified in 
        subsection (b).
          (3) Payments to foreign persons.--
                  (A) In general.--The Secretary shall by 
                regulations apply the matching principle of 
                paragraph (2) in cases in which the person to 
                whom the payment is to be made is not a United 
                States person.
                  (B) Special rule for certain foreign 
                entities.--
                          (i) In general.--Notwithstanding 
                        subparagraph (A), in the case of any 
                        item payable to a controlled foreign 
                        corporation (as defined in section 957) 
                        or a passive foreign investment company 
                        (as defined in section 1297), a 
                        deduction shall be allowable to the 
                        payor with respect to such amount for 
                        any taxable year before the taxable 
                        year in which paid only to the extent 
                        that an amount attributable to such 
                        item is includible (determined without 
                        regard to properly allocable deductions 
                        and qualified deficits under section 
                        952(c)(1)(B)) during such prior taxable 
                        year in the gross income of a United 
                        States person who owns (within the 
                        meaning of section 958(a)) stock in 
                        such corporation.
                          (ii) Secretarial authority.--The 
                        Secretary may by regulation exempt 
                        transactions from the application of 
                        clause (i), including any transaction 
                        which is entered into by a payor in the 
                        ordinary course of a trade or business 
                        in which the payor is predominantly 
                        engaged and in which the payment of the 
                        accrued amounts occurs within 81/2 
                        months after accrual or within such 
                        other period as the Secretary may 
                        prescribe.
  (b) Relationships.--The persons referred to in subsection (a) 
are:
          (1) Members of a family, as defined in subsection 
        (c)(4);
          (2) An individual and a corporation more than 50 
        percent in value of the outstanding stock of which is 
        owned, directly or indirectly, by or for such 
        individual;
          (3) Two corporations which are members of the same 
        controlled group (as defined in subsection (f));
          (4) A grantor and a fiduciary of any trust;
          (5) A fiduciary of a trust and a fiduciary of another 
        trust, if the same person is a grantor of both trusts;
          (6) A fiduciary of a trust and a beneficiary of such 
        trust;
          (7) A fiduciary of a trust and a beneficiary of 
        another trust, if the same person is a grantor of both 
        trusts;
          (8) A fiduciary of a trust and a corporation more 
        than 50 percent in value of the outstanding stock of 
        which is owned, directly or indirectly, by or for the 
        trust or by or for a person who is a grantor of the 
        trust;
          (9) A person and an organization to which section 501 
        (relating to certain educational and charitable 
        organizations which are exempt from tax) applies and 
        which is controlled directly or indirectly by such 
        person or (if such person is an individual) by members 
        of the family of such individual;
          (10) A corporation and a partnership if the same 
        persons own--
                  (A) more than 50 percent in value of the 
                outstanding stock of the corporation, and
                  (B) more than 50 percent of the capital 
                interest, or the profits interest, in the 
                partnership;
          (11) An S corporation and another S corporation if 
        the same persons own more than 50 percent in value of 
        the outstanding stock of each corporation;
          (12) An S corporation and a C corporation, if the 
        same persons own more than 50 percent in value of the 
        outstanding stock of each corporation; or
          (13) Except in the case of a sale or exchange in 
        satisfaction of a pecuniary bequest, an executor of an 
        estate and a beneficiary of such estate.
  (c) Constructive ownership of stock.--For purposes of 
determining, in applying subsection (b), the ownership of 
stock--
          (1) Stock owned, directly or indirectly, by or for a 
        corporation, partnership, estate, or trust shall be 
        considered as being owned proportionately by or for its 
        shareholders, partners, or beneficiaries;
          (2) An individual shall be considered as owning the 
        stock owned, directly or indirectly, by or for [his] 
        the individual's family;
          (3) An individual owning (otherwise than by the 
        application of paragraph (2)) any stock in a 
        corporation shall be considered as owning the stock 
        owned, directly or indirectly, by or for [his] the 
        individual's partner;
          (4) The family of an individual shall include only 
        [his] the individual's brothers and sisters (whether by 
        the whole or half blood), spouse, ancestors, and lineal 
        descendants; and
          (5) Stock constructively owned by a person by reason 
        of the application of paragraph (1) shall, for the 
        purpose of applying paragraph (1), (2), or (3), be 
        treated as actually owned by such person, but stock 
        constructively owned by an individual by reason of the 
        application of paragraph (2) or (3) shall not be 
        treated as owned by him for the purpose of again 
        applying either of such paragraphs in order to make 
        another the constructive owner of such stock.
  (d) Amount of gain where loss previously disallowed.--
          (1) In general.--If--
                  (A) in the case of a sale or exchange of 
                property to the taxpayer a loss sustained by 
                the transferor is not allowable to the 
                transferor as a deduction by reason of 
                subsection (a)(1), and
                  (B) the taxpayer sells or otherwise disposes 
                of such property (or of other property the 
                basis of which in the taxpayer's hands is 
                determined directly or indirectly by reference 
                to such property) at a gain,
        then such gain shall be recognized only to the extent 
        that it exceeds so much of such loss as is properly 
        allocable to the property sold or otherwise disposed of 
        by the taxpayer.
          (2) Exception for wash sales.--Paragraph (1) shall 
        not apply if the loss sustained by the transferor is 
        not allowable to the transferor as a deduction by 
        reason of section 1091 (relating to wash sales).
          (3) Exception for transfers from tax indifferent 
        parties.--Paragraph (1) shall not apply to the extent 
        any loss sustained by the transferor (if allowed) would 
        not be taken into account in determining a tax imposed 
        under section 1 or 11 or a tax computed as provided by 
        either of such sections.
  (e) Special rules for pass-thru entities.--
          (1) In general.--In the case of any amount paid or 
        incurred by, to, or on behalf of, a pass-thru entity, 
        for purposes of applying subsection (a)(2)--
                  (A) such entity,
                  (B) in the case of--
                          (i) a partnership, any person who 
                        owns (directly or indirectly) any 
                        capital interest or profits interest of 
                        such partnership, or
                          (ii) an S corporation, any person who 
                        owns (directly or indirectly) any of 
                        the stock of such corporation,
                  (C) any person who owns (directly or 
                indirectly) any capital interest or profits 
                interest of a partnership in which such entity 
                owns (directly or indirectly) any capital 
                interest or profits interest, and
                  (D) any person related (within the meaning of 
                subsection (b) of this section or section 
                707(b)(1)) to a person described in 
                subparagraph (B) or (C),
        shall be treated as persons specified in a paragraph of 
        subsection (b). Subparagraph (C) shall apply to a 
        transaction only if such transaction is related either 
        to the operations of the partnership described in such 
        subparagraph or to an interest in such partnership.
          (2) Pass-thru entity.--For purposes of this section, 
        the term ``pass-thru entity'' means--
                  (A) a partnership, and
                  (B) an S corporation.
          (3) Constructive ownership in the case of 
        partnerships.--For purposes of determining ownership of 
        a capital interest or profits interest of a 
        partnership, the principles of subsection (c) shall 
        apply, except that--
                  (A) paragraph (3) of subsection (c) shall not 
                apply, and
                  (B) interests owned (directly or indirectly) 
                by or for a C corporation shall be considered 
                as owned by or for any shareholder only if such 
                shareholder owns (directly or indirectly) 5 
                percent or more in value of the stock of such 
                corporation.
          (4) Subsection (a)(2) not to apply to certain 
        guaranteed payments of partnerships.--In the case of 
        any amount paid or incurred by a partnership, 
        subsection (a)(2) shall not apply to the extent that 
        section 707(c) applies to such amount.
          (5) Exception for certain expenses and interest of 
        partnerships owning low-income housing.--
                  (A) In general.--This subsection shall not 
                apply with respect to qualified expenses and 
                interest paid or incurred by a partnership 
                owning low-income housing to--
                          (i) any qualified 5-percent or less 
                        partner of such partnership, or
                          (ii) any person related (within the 
                        meaning of subsection (b) of this 
                        section or section 707(b)(1)) to any 
                        qualified 5-percent or less partner of 
                        such partnership.
                  (B) Qualified 5-percent or less partner.--For 
                purposes of this paragraph, the term 
                ``qualified 5-percent or less partner'' means 
                any partner who has (directly or indirectly) an 
                interest of 5 percent or less in the aggregate 
                capital and profits interests of the 
                partnership but only if--
                          (i) such partner owned the low-income 
                        housing at all times during the 2-year 
                        period ending on the date such housing 
                        was transferred to the partnership, or
                          (ii) such partnership acquired the 
                        low-income housing pursuant to a 
                        purchase, assignment, or other transfer 
                        from the Department of Housing and 
                        Urban Development or any State or local 
                        housing authority.
                For purposes of the preceding sentence, a 
                partner shall be treated as holding any 
                interest in the partnership which is held 
                (directly or indirectly) by any person related 
                (within the meaning of subsection (b) of this 
                section or section 707(b)(1)) to such partner.
                  (C) Qualified expenses and interest.--For 
                purpose of this paragraph, the term ``qualified 
                expenses and interest'' means any expense or 
                interest incurred by the partnership with 
                respect to low-income housing held by the 
                partnership but--
                          (i) only if the amount of such 
                        expense or interest (as the case may 
                        be) is unconditionally required to be 
                        paid by the partnership not later than 
                        10 years after the date such amount was 
                        incurred, and
                          (ii) in the case of such interest, 
                        only if such interest is incurred at an 
                        annual rate not in excess of 12 
                        percent.
                  (D) Low-income housing.--For purposes of this 
                paragraph, the term ``low-income housing'' 
                means--
                          (i) any interest in property 
                        described in clause (i), (ii), (iii), 
                        or (iv) of section 1250(a)(1)(B), and
                          (ii) any interest in a partnership 
                        owning such property.
          (6) Cross reference.--For additional rules relating 
        to partnerships, see section 707(b).
  (f) Controlled group defined; special rules applicable to 
controlled groups.--
          (1) Controlled group defined.--For purposes of this 
        section, the term ``controlled group'' has the meaning 
        given to such term by section 1563(a), except that--
                  (A) ``more than 50 percent'' shall be 
                substituted for ``at least 80 percent'' each 
                place it appears in section 1563(a), and
                  (B) the determination shall be made without 
                regard to subsections (a)(4) and (e)(3)(C) of 
                section 1563.
          (2) Deferral (rather than denial) of loss from sale 
        or exchange between members.--In the case of any loss 
        from the sale or exchange of property which is between 
        members of the same controlled group and to which 
        subsection (a)(1) applies (determined without regard to 
        this paragraph but with regard to paragraph (3))--
                  (A) subsections (a)(1) and (d) shall not 
                apply to such loss, but
                  (B) such loss shall be deferred until the 
                property is transferred outside such controlled 
                group and there would be recognition of loss 
                under consolidated return principles or until 
                such other time as may be prescribed in 
                regulations.
          (3) Loss deferral rules not to apply in certain 
        cases.--
                  (A) Transfer to DISC.--For purposes of 
                applying subsection (a)(1), the term 
                ``controlled group'' shall not include a DISC.
                  (B) Certain sales of inventory.--Except to 
                the extent provided in regulations prescribed 
                by the Secretary, subsection (a)(1) shall not 
                apply to the sale or exchange of property 
                between members of the same controlled group 
                (or persons described in subsection (b)(10)) 
                if--
                          (i) such property in the hands of the 
                        transferor is property described in 
                        section 1221(a)(1),
                          (ii) such sale or exchange is in the 
                        ordinary course of the transferor's 
                        trade or business,
                          (iii) such property in the hands of 
                        the transferee is property described in 
                        section 1221(a)(1), and
                          (iv) the transferee or the transferor 
                        is a foreign corporation.
                  (C) Certain foreign currency losses.--To the 
                extent provided in regulations, subsection 
                (a)(1) shall not apply to any loss sustained by 
                a member of a controlled group on the repayment 
                of a loan made to another member of such group 
                if such loan is payable in a foreign currency 
                or is denominated in such a currency and such 
                loss is attributable to a reduction in value of 
                such foreign currency.
                  (D) Redemptions by fund-of-funds regulated 
                investment companies.--Except to the extent 
                provided in regulations prescribed by the 
                Secretary, subsection (a)(1) shall not apply to 
                any distribution in redemption of stock of a 
                regulated investment company if--
                          (i) such company issues only stock 
                        which is redeemable upon the demand of 
                        the stockholder, and
                          (ii) such redemption is upon the 
                        demand of another regulated investment 
                        company.
          (4) Determination of relationship resulting in 
        disallowance of loss, for purposes of other 
        provisions.--For purposes of any other section of this 
        title which refers to a relationship which would result 
        in a disallowance of losses under this section, 
        deferral under paragraph (2) shall be treated as 
        disallowance.
  (g) Coordination with section 1041.--Subsection (a)(1) shall 
not apply to any transfer described in section 1041(a) 
(relating to transfers of property between spouses or incident 
to divorce).

           *       *       *       *       *       *       *


SEC. 274. DISALLOWANCE OF CERTAIN ENTERTAINMENT, ETC., EXPENSES.

  (a) Entertainment, amusement, recreation, or qualified 
transportation fringes.--
          (1) In general.--No deduction otherwise allowable 
        under this chapter shall be allowed for any item--
                  (A) Activity.--With respect to an activity 
                which is of a type generally considered to 
                constitute entertainment, amusement, or 
                recreation, or
                  (B) Facility.--With respect to a facility 
                used in connection with an activity referred to 
                in subparagraph (A).
          (2) Special rules.--For purposes of applying 
        paragraph (1)--
                  (A) Dues or fees to any social, athletic, or 
                sporting club or organization shall be treated 
                as items with respect to facilities.
                  (B) An activity described in section 212 
                shall be treated as a trade or business.
          (3) Denial of deduction for club dues.--
        Notwithstanding the preceding provisions of this 
        subsection, no deduction shall be allowed under this 
        chapter for amounts paid or incurred for membership in 
        any club organized for business, pleasure, recreation, 
        or other social purpose.
          (4) Qualified transportation fringes.--No deduction 
        shall be allowed under this chapter for the expense of 
        any qualified transportation fringe (as defined in 
        section 132(f)) provided to an employee of the 
        taxpayer.
  (b) Gifts.--
          (1) Limitation.--No deduction shall be allowed under 
        section 162 or section 212 for any expense for gifts 
        made directly or indirectly to any individual to the 
        extent that such expense, when added to prior expenses 
        of the taxpayer for gifts made to such individual 
        during the same taxable year, exceeds $25. For purposes 
        of this section, the term ``gift'' means any item 
        excludable from gross income of the recipient under 
        section 102 which is not excludable from his gross 
        income under any other provision of this chapter, but 
        such term does not include--
                  (A) an item having a cost to the taxpayer not 
                in excess of $4.00 on which the name of the 
                taxpayer is clearly and permanently imprinted 
                and which is one of a number of identical items 
                distributed generally by the taxpayer, or
                  (B) a sign, display rack, or other 
                promotional material to be used on the business 
                premises of the recipient.
          (2) Special rules.--
                  (A) In the case of a gift by a partnership, 
                the limitation contained in paragraph (1) shall 
                apply to the partnership as well as to each 
                member thereof.
                  (B) For purposes of paragraph (1), a [husband 
                and wife] married couple shall be treated as 
                one taxpayer.
  (c) Certain foreign travel.--
          (1) In general.--In the case of any individual who 
        travels outside the United States away from home in 
        pursuit of a trade or business or in pursuit of an 
        activity described in section 212, no deduction shall 
        be allowed under section 162 or section 212 for that 
        portion of the expenses of such travel otherwise 
        allowable under such section which, under regulations 
        prescribed by the Secretary, is not allocable to such 
        trade or business or to such activity.
          (2) Exception.--Paragraph (1) shall not apply to the 
        expenses of any travel outside the United States away 
        from home if--
                  (A) such travel does not exceed one week, or
                  (B) the portion of the time of travel outside 
                the United States away from home which is not 
                attributable to the pursuit of the taxpayer's 
                trade or business or an activity described in 
                section 212 is less than 25 percent of the 
                total time on such travel.
          (3) Domestic travel excluded.--For purposes of this 
        subsection, travel outside the United States does not 
        include any travel from one point in the United States 
        to another point in the United States.
  (d) Substantiation required.--No deduction or credit shall be 
allowed--
          (1) under section 162 or 212 for any traveling 
        expense (including meals and lodging while away from 
        home),
          (2) for any expense for gifts, or
          (3) with respect to any listed property (as defined 
        in section 280F(d)(4)),
unless the taxpayer substantiates by adequate records or by 
sufficient evidence corroborating the taxpayer's own statement 
(A) the amount of such expense or other item, (B) the time and 
place of the travel or the date and description of the gift, 
(C) the business purpose of the expense or other item, and (D) 
the business relationship to the taxpayer of the person 
receiving the benefit. The Secretary may by regulations provide 
that some or all of the requirements of the preceding sentence 
shall not apply in the case of an expense which does not exceed 
an amount prescribed pursuant to such regulations. This 
subsection shall not apply to any qualified nonpersonal use 
vehicle (as defined in subsection (i)).
  (e) Specific exceptions to application of subsection (a).--
Subsection (a) shall not apply to--
          (1) Food and beverages for employees.--Expenses for 
        food and beverages (and facilities used in connection 
        therewith) furnished on the business premises of the 
        taxpayer primarily for his employees.
          (2) Expenses treated as compensation.--
                  (A) In general.--Except as provided in 
                subparagraph (B), expenses for goods, services, 
                and facilities, to the extent that the expenses 
                are treated by the taxpayer, with respect to 
                the recipient of the entertainment, amusement, 
                or recreation, as compensation to an employee 
                on the taxpayer's return of tax under this 
                chapter and as wages to such employee for 
                purposes of chapter 24 (relating to withholding 
                of income tax at source on wages).
                  (B) Specified individuals.--
                          (i) In general.--In the case of a 
                        recipient who is a specified 
                        individual, subparagraph (A) and 
                        paragraph (9) shall each be applied by 
                        substituting ``to the extent that the 
                        expenses do not exceed the amount of 
                        the expenses which'' for ``to the 
                        extent that the expenses''.
                          (ii) Specified individual.--For 
                        purposes of clause (i), the term 
                        ``specified individual'' means any 
                        individual who--
                                  (I) is subject to the 
                                requirements of section 16(a) 
                                of the Securities Exchange Act 
                                of 1934 with respect to the 
                                taxpayer or a related party to 
                                the taxpayer, or
                                  (II) would be subject to such 
                                requirements if the taxpayer 
                                (or such related party) were an 
                                issuer of equity securities 
                                referred to in such section.
                 For purposes of this clause, a person is a 
                related party with respect to another person if 
                such person bears a relationship to such other 
                person described in section 267(b) or 707(b).
          (3) Reimbursed expenses.--Expenses paid or incurred 
        by the taxpayer, in connection with the performance by 
        him of services for another person (whether or not such 
        other person is his employer), under a reimbursement or 
        other expense allowance arrangement with such other 
        person, but this paragraph shall apply--
                  (A) where the services are performed for an 
                employer, only if the employer has not treated 
                such expenses in the manner provided in 
                paragraph (2), or
                  (B) where the services are performed for a 
                person other than an employer, only if the 
                taxpayer accounts (to the extent provided by 
                subsection (d)) to such person.
          (4) Recreational, etc., expenses for employees.--
        Expenses for recreational, social, or similar 
        activities (including facilities therefor) primarily 
        for the benefit of employees (other than employees who 
        are highly compensated employees (within the meaning of 
        section 414(q))). For purposes of this paragraph, an 
        individual owning less than a 10-percent interest in 
        the taxpayer's trade or business shall not be 
        considered a shareholder or other owner, and for such 
        purposes an individual shall be treated as owning any 
        interest owned by a member of his family (within the 
        meaning of section 267(c)(4)). This paragraph shall not 
        apply for purposes of subsection (a)(3).
          (5) Employees, stockholder, etc., business 
        meetings.--Expenses incurred by a taxpayer which are 
        directly related to business meetings of his employees, 
        stockholders, agents, or directors.
          (6) Meetings of business leagues, etc..--Expenses 
        directly related and necessary to attendance at a 
        business meeting or convention of any organization 
        described in section 501(c)(6) (relating to business 
        leagues, chambers of commerce, real estate boards, and 
        boards of trade) and exempt from taxation under section 
        501(a).
          (7) Items available to public.--Expenses for goods, 
        services, and facilities made available by the taxpayer 
        to the general public.
          (8) Entertainment sold to customers.--Expenses for 
        goods or services (including the use of facilities) 
        which are sold by the taxpayer in a bona fide 
        transaction for an adequate and full consideration in 
        money or money's worth.
          (9) Expenses includible in income of persons who are 
        not employees.--Expenses paid or incurred by the 
        taxpayer for goods, services, and facilities to the 
        extent that the expenses are includible in the gross 
        income of a recipient of the entertainment, amusement, 
        or recreation who is not an employee of the taxpayer as 
        compensation for services rendered or as a prize or 
        award under section 74. The preceding sentence shall 
        not apply to any amount paid or incurred by the 
        taxpayer if such amount is required to be included (or 
        would be so required except that the amount is less 
        than $600) in any information return filed by such 
        taxpayer under part III of subchapter A of chapter 61 
        and is not so included.
For purposes of this subsection, any item referred to in 
subsection (a) shall be treated as an expense.
  (f) Interest, taxes, casualty losses, etc..--This section 
shall not apply to any deduction allowable to the taxpayer 
without regard to its connection with his trade or business (or 
with his income-producing activity). In the case of a taxpayer 
which is not an individual, the preceding sentence shall be 
applied as if it were an individual.
  (g) Treatment of entertainment, etc., type facility.--For 
purposes of this chapter, if deductions are disallowed under 
subsection (a) with respect to any portion of a facility, such 
portion shall be treated as an asset which is used for 
personal, living, and family purposes (and not as an asset used 
in the trade or business).
  (h) Attendance at conventions, etc..--
          (1) In general.--In the case of any individual who 
        attends a convention, seminar, or similar meeting which 
        is held outside the North American area, no deduction 
        shall be allowed under section 162 for expenses 
        allocable to such meeting unless the taxpayer 
        establishes that the meeting is directly related to the 
        active conduct of his trade or business and that, after 
        taking into account in the manner provided by 
        regulations prescribed by the Secretary--
                  (A) the purpose of such meeting and the 
                activities taking place at such meeting,
                  (B) the purposes and activities of the 
                sponsoring organizations or groups,
                  (C) the residences of the active members of 
                the sponsoring organization and the places at 
                which other meetings of the sponsoring 
                organization or groups have been held or will 
                be held, and
                  (D) such other relevant factors as the 
                taxpayer may present,
        it is as reasonable for the meeting to be held outside 
        the North American area as within the North American 
        area.
          (2) Conventions on cruise ships.--In the case of any 
        individual who attends a convention, seminar, or other 
        meeting which is held on any cruise ship, no deduction 
        shall be allowed under section 162 for expenses 
        allocable to such meeting, unless the taxpayer meets 
        the requirements of paragraph (5) and establishes that 
        the meeting is directly related to the active conduct 
        of his trade or business and that--
                  (A) the cruise ship is a vessel registered in 
                the United States; and
                  (B) all ports of call of such cruise ship are 
                located in the United States or in possessions 
                of the United States.
        With respect to cruises beginning in any calendar year, 
        not more than $2,000 of the expenses attributable to an 
        individual attending one or more meetings may be taken 
        into account under section 162 by reason of the 
        preceding sentence.
          (3) Definitions.--For purposes of this subsection--
                  (A) North American area.--The term ``North 
                American area'' means the United States, its 
                possessions, and the Trust Territory of the 
                Pacific Islands, and Canada and Mexico.
                  (B) Cruise ship.--The term ``cruise ship'' 
                means any vessel sailing within or without the 
                territorial waters of the United States.
          (4) Subsection to apply to employer as well as to 
        traveler.--
                  (A) Except as provided in subparagraph (B), 
                this subsection shall apply to deductions 
                otherwise allowable under section 162 to any 
                person, whether or not such person is the 
                individual attending the convention, seminar, 
                or similar meeting.
                  (B) This subsection shall not deny a 
                deduction to any person other than the 
                individual attending the convention, seminar, 
                or similar meeting with respect to any amount 
                paid by such person to or on behalf of such 
                individual if includible in the gross income of 
                such individual. The preceding sentence shall 
                not apply if the amount is required to be 
                included in any information return filed by 
                such person under part III of subchapter A of 
                chapter 61 and is not so included.
          (5) Reporting requirements.--No deduction shall be 
        allowed under section 162 for expenses allocable to 
        attendance at a convention, seminar, or similar meeting 
        on any cruise ship unless the taxpayer claiming the 
        deduction attaches to the return of tax on which the 
        deduction is claimed--
                  (A) a written statement signed by the 
                individual attending the meeting which 
                includes--
                          (i) information with respect to the 
                        total days of the trip, excluding the 
                        days of transportation to and from the 
                        cruise ship port, and the number of 
                        hours of each day of the trip which 
                        such individual devoted to scheduled 
                        business activities,
                          (ii) a program of the scheduled 
                        business activities of the meeting, and
                          (iii) such other information as may 
                        be required in regulations prescribed 
                        by the Secretary; and
                  (B) a written statement signed by an officer 
                of the organization or group sponsoring the 
                meeting which includes--
                          (i) a schedule of the business 
                        activities of each day of the meeting,
                          (ii) the number of hours which the 
                        individual attending the meeting 
                        attended such scheduled business 
                        activities, and
                          (iii) such other information as may 
                        be required in regulations prescribed 
                        by the Secretary.
          (6) Treatment of conventions in certain Caribbean 
        countries.--
                  (A) In general.--For purposes of this 
                subsection, the term ``North American area'' 
                includes, with respect to any convention, 
                seminar, or similar meeting, any beneficiary 
                country if (as of the time such meeting 
                begins)--
                          (i) there is in effect a bilateral or 
                        multilateral agreement described in 
                        subparagraph (C) between such country 
                        and the United States providing for the 
                        exchange of information between the 
                        United States and such country, and
                          (ii) there is not in effect a finding 
                        by the Secretary that the tax laws of 
                        such country discriminate against 
                        conventions held in the United States.
                  (B) Beneficiary country.--For purposes of 
                this paragraph, the term ``beneficiary 
                country'' has the meaning given to such term by 
                section 212(a)(1)(A) of the Caribbean Basin 
                Economic Recovery Act; except that such term 
                shall include Bermuda.
                  (C) Authority to conclude exchange of 
                information agreements.--
                          (i) In general.--The Secretary is 
                        authorized to negotiate and conclude an 
                        agreement for the exchange of 
                        information with any beneficiary 
                        country. Except as provided in clause 
                        (ii), an exchange of information 
                        agreement shall provide for the 
                        exchange of such information (not 
                        limited to information concerning 
                        nationals or residents of the United 
                        States or the beneficiary country) as 
                        may be necessary or appropriate to 
                        carry out and enforce the tax laws of 
                        the United States and the beneficiary 
                        country (whether criminal or civil 
                        proceedings), including information 
                        which may otherwise be subject to 
                        nondisclosure provisions of the local 
                        law of the beneficiary country such as 
                        provisions respecting bank secrecy and 
                        bearer shares. The exchange of 
                        information agreement shall be 
                        terminable by either country on 
                        reasonable notice and shall provide 
                        that information received by either 
                        country will be disclosed only to 
                        persons or authorities (including 
                        courts and administrative bodies) 
                        involved in the administration or 
                        oversight of, or in the determination 
                        of appeals in respect of, taxes of the 
                        United States or the beneficiary 
                        country and will be used by such 
                        persons or authorities only for such 
                        purposes.
                          (ii) Nondisclosure of qualified 
                        confidential information sought for 
                        civil tax purposes.--An exchange of 
                        information agreement need not provide 
                        for the exchange of qualified 
                        confidential information which is 
                        sought only for civil tax purposes if--
                                  (I) the Secretary of the 
                                Treasury, after making all 
                                reasonable efforts to negotiate 
                                an agreement which includes the 
                                exchange of such information, 
                                determines that such an 
                                agreement cannot be negotiated 
                                but that the agreement which 
                                was negotiated will 
                                significantly assist in the 
                                administration and enforcement 
                                of the tax laws of the United 
                                States, and
                                  (II) the President determines 
                                that the agreement as 
                                negotiated is in the national 
                                security interest of the United 
                                States.
                          (iii) Qualified confidential 
                        information defined.--For purposes of 
                        this subparagraph, the term ``qualified 
                        confidential information'' means 
                        information which is subject to the 
                        nondisclosure provisions of any local 
                        law of the beneficiary country 
                        regarding bank secrecy or ownership of 
                        bearer shares.
                          (iv) Civil tax purposes.--For 
                        purposes of this subparagraph, the 
                        determination of whether information is 
                        sought only for civil tax purposes 
                        shall be made by the requesting party.
                  (D) Coordination with other provisions.--Any 
                exchange of information agreement negotiated 
                under subparagraph (C) shall be treated as an 
                income tax convention for purposes of section 
                6103(k)(4). The Secretary may exercise his 
                authority under subchapter A of chapter 78 to 
                carry out any obligation of the United States 
                under an agreement referred to in subparagraph 
                (C).
                  (E) Determinations published in the Federal 
                Register.--The following shall be published in 
                the Federal Register--
                          (i) any determination by the 
                        President under subparagraph (C)(ii) 
                        (including the reasons for such 
                        determination),
                          (ii) any determination by the 
                        Secretary under subparagraph (C)(ii) 
                        (including the reasons for such 
                        determination), and
                          (iii) any finding by the Secretary 
                        under subparagraph (A)(ii) (and any 
                        termination thereof).
          (7) Seminars, etc. for section 212 purposes.--No 
        deduction shall be allowed under section 212 for 
        expenses allocable to a convention, seminar, or similar 
        meeting.
  (i) Qualified nonpersonal use vehicle.--For purposes of 
subsection (d), the term ``qualified nonpersonal use vehicle'' 
means any vehicle which, by reason of its nature, is not likely 
to be used more than a de minimis amount for personal purposes.
  (j) Employee achievement awards.--
          (1) General rule.--No deduction shall be allowed 
        under section 162 or section 212 for the cost of an 
        employee achievement award except to the extent that 
        such cost does not exceed the deduction limitations of 
        paragraph (2).
          (2) Deduction limitations.--The deduction for the 
        cost of an employee achievement award made by an 
        employer to an employee--
                  (A) which is not a qualified plan award, when 
                added to the cost to the employer for all other 
                employee achievement awards made to such 
                employee during the taxable year which are not 
                qualified plan awards, shall not exceed $400, 
                and
                  (B) which is a qualified plan award, when 
                added to the cost to the employer for all other 
                employee achievement awards made to such 
                employee during the taxable year (including 
                employee achievement awards which are not 
                qualified plan awards), shall not exceed 
                $1,600.
          (3) Definitions.--For purposes of this subsection--
                  (A) Employee achievement award.--
                          (i) In general.--The term ``employee 
                        achievement award'' means an item of 
                        tangible personal property which is--
                                  (I) transferred by an 
                                employer to an employee for 
                                length of service achievement 
                                or safety achievement,
                                  (II) awarded as part of a 
                                meaningful presentation, and
                                  (III) awarded under 
                                conditions and circumstances 
                                that do not create a 
                                significant likelihood of the 
                                payment of disguised 
                                compensation.
                          (ii) Tangible personal property.--For 
                        purposes of clause (i), the term 
                        ``tangible personal property'' shall 
                        not include--
                                  (I) cash, cash equivalents, 
                                gift cards, gift coupons, or 
                                gift certificates (other than 
                                arrangements conferring only 
                                the right to select and receive 
                                tangible personal property from 
                                a limited array of such items 
                                pre-selected or pre-approved by 
                                the employer), or
                                  (II) vacations, meals, 
                                lodging, tickets to theater or 
                                sporting events, stocks, bonds, 
                                other securities, and other 
                                similar items.
                  (B) Qualified plan award.--
                          (i) In general.--The term ``qualified 
                        plan award'' means an employee 
                        achievement award awarded as part of an 
                        established written plan or program of 
                        the taxpayer which does not 
                        discriminate in favor of highly 
                        compensated employees (within the 
                        meaning of section 414(q)) as to 
                        eligibility or benefits.
                          (ii) Limitation.--An employee 
                        achievement award shall not be treated 
                        as a qualified plan award for any 
                        taxable year if the average cost of all 
                        employee achievement awards which are 
                        provided by the employer during the 
                        year, and which would be qualified plan 
                        awards but for this subparagraph, 
                        exceeds $400. For purposes of the 
                        preceding sentence, average cost shall 
                        be determined by including the entire 
                        cost of qualified plan awards, without 
                        taking into account employee 
                        achievement awards of nominal value.
          (4) Special rules.--For purposes of this subsection--
                  (A) Partnerships.--In the case of an employee 
                achievement award made by a partnership, the 
                deduction limitations contained in paragraph 
                (2) shall apply to the partnership as well as 
                to each member thereof.
                  (B) Length of service awards.--An item shall 
                not be treated as having been provided for 
                length of service achievement if the item is 
                received during the recipient's 1st 5 years of 
                employment or if the recipient received a 
                length of service achievement award (other than 
                an award excludable under section 132(e)(1)) 
                during that year or any of the prior 4 years.
                  (C) Safety achievement awards.--An item 
                provided by an employer to an employee shall 
                not be treated as having been provided for 
                safety achievement if--
                          (i) during the taxable year, employee 
                        achievement awards (other than awards 
                        excludable under section 132(e)(1)) for 
                        safety achievement have previously been 
                        awarded by the employer to more than 10 
                        percent of the employees of the 
                        employer (excluding employees described 
                        in clause (ii)), or
                          (ii) such item is awarded to a 
                        manager, administrator, clerical 
                        employee, or other professional 
                        employee.
  (k) Business meals.--
          (1) In general.--No deduction shall be allowed under 
        this chapter for the expense of any food or beverages 
        unless--
                  (A) such expense is not lavish or extravagant 
                under the circumstances, and
                  (B) the taxpayer (or an employee of the 
                taxpayer) is present at the furnishing of such 
                food or beverages.
          (2) Exceptions.--Paragraph (1) shall not apply to--
                  (A) any expense described in paragraph (2), 
                (3), (4), (7), (8), or (9) of subsection (e), 
                and
                  (B) any other expense to the extent provided 
                in regulations.
  (l) Transportation and commuting benefits.--
          (1) In general.--No deduction shall be allowed under 
        this chapter for any expense incurred for providing any 
        transportation, or any payment or reimbursement, to an 
        employee of the taxpayer in connection with travel 
        between the employee's residence and place of 
        employment, except as necessary for ensuring the safety 
        of the employee.
          (2) Exception.--In the case of any qualified bicycle 
        commuting reimbursement (as described in section 
        132(f)(5)(F)), this subsection shall not apply for any 
        amounts paid or incurred after December 31, 2017, and 
        before January 1, 2026.
  (m) Additional limitations on travel expenses.--
          (1) Luxury water transportation.--
                  (A) In general.--No deduction shall be 
                allowed under this chapter for expenses 
                incurred for transportation by water to the 
                extent such expenses exceed twice the aggregate 
                per diem amounts for days of such 
                transportation. For purposes of the preceding 
                sentence, the term ``per diem amounts'' means 
                the highest amount generally allowable with 
                respect to a day to employees of the executive 
                branch of the Federal Government for per diem 
                while away from home but serving in the United 
                States.
                  (B) Exceptions.--Subparagraph (A) shall not 
                apply to--
                          (i) any expense allocable to a 
                        convention, seminar, or other meeting 
                        which is held on any cruise ship, and
                          (ii) any expense described in 
                        paragraph (2), (3), (4), (7), (8), or 
                        (9) of subsection (e).
          (2) Travel as form of education.--No deduction shall 
        be allowed under this chapter for expenses for travel 
        as a form of education.
          (3) Travel expenses of spouse, dependent, or 
        others.--No deduction shall be allowed under this 
        chapter (other than section 217) for travel expenses 
        paid or incurred with respect to a spouse, dependent, 
        or other individual accompanying the taxpayer (or an 
        officer or employee of the taxpayer) on business 
        travel, unless--
                  (A) the spouse, dependent, or other 
                individual is an employee of the taxpayer,
                  (B) the travel of the spouse, dependent, or 
                other individual is for a bona fide business 
                purpose, and
                  (C) such expenses would otherwise be 
                deductible by the spouse, dependent, or other 
                individual.
  (n) Only 50 percent of meal expenses allowed as deduction.--
          (1) In general.--The amount allowable as a deduction 
        under this chapter for any expense for food or 
        beverages shall not exceed 50 percent of the amount of 
        such expense which would (but for this paragraph) be 
        allowable as a deduction under this chapter.
          (2) Exceptions.--Paragraph (1) shall not apply to any 
        expense if--
                  (A) such expense is described in paragraph 
                (2), (3), (4), (7), (8), or (9) of subsection 
                (e),
                  (B) in the case of an employer who pays or 
                reimburses moving expenses of an employee, such 
                expenses are includible in the income of the 
                employee under section 82, or
                  (C) such expense is for food or beverages--
                          (i) required by any Federal law to be 
                        provided to crew members of a 
                        commercial vessel,
                          (ii) provided to crew members of a 
                        commercial vessel--
                                  (I) which is operating on the 
                                Great Lakes, the Saint Lawrence 
                                Seaway, or any inland waterway 
                                of the United States, and
                                  (II) which is of a kind which 
                                would be required by Federal 
                                law to provide food and 
                                beverages to crew members if it 
                                were operated at sea,
                          (iii) provided on an oil or gas 
                        platform or drilling rig if the 
                        platform or rig is located offshore, or
                          (iv) provided on an oil or gas 
                        platform or drilling rig, or at a 
                        support camp which is in proximity and 
                        integral to such platform or rig, if 
                        the platform or rig is located in the 
                        United States north of 54 degrees north 
                        latitude.
        Clauses (i) and (ii) of subparagraph (C) shall not 
        apply to vessels primarily engaged in providing luxury 
        water transportation (determined under the principles 
        of subsection (m)). In the case of the employee, the 
        exception of subparagraph (A) shall not apply to 
        expenses described in subparagraph (B).
          (3) Special rule for individuals subject to Federal 
        hours of service.--In the case of any expenses for food 
        or beverages consumed while away from home (within the 
        meaning of section 162(a)(2)) by an individual during, 
        or incident to, the period of duty subject to the hours 
        of service limitations of the Department of 
        Transportation, paragraph (1) shall be applied by 
        substituting ``80 percent'' for ``50 percent''.
  (o)  Regulatory authority.--The Secretary shall prescribe 
such regulations as he may deem necessary to carry out the 
purposes of this section, including regulations prescribing 
whether subsection (a) or subsection (b) applies in cases where 
both such subsections would otherwise apply.

Subchapter C--CORPORATE DISTRIBUTIONS AND ADJUSTMENTS

           *       *       *       *       *       *       *


PART I--DISTRIBUTIONS BY CORPORATIONS

           *       *       *       *       *       *       *


Subpart C--DEFINITIONS; CONSTRUCTIVE OWNERSHIP OF STOCK

           *       *       *       *       *       *       *


SEC. 318. CONSTRUCTIVE OWNERSHIP OF STOCK.

  (a) General rule.--For purposes of those provisions of this 
subchapter to which the rules contained in this section are 
expressly made applicable--
          (1) Members of family.--
                  (A) In general.--An individual shall be 
                considered as owning the stock owned, directly 
                or indirectly, by or for--
                          (i) [his spouse] the individual's 
                        spouse (other than a spouse who is 
                        legally separated from the individual 
                        under a decree of divorce or separate 
                        maintenance), and
                          (ii) [his] the individual's children, 
                        grandchildren, and parents.
                  (B) Effect of adoption.--For purposes of 
                subparagraph (A)(ii), a legally adopted child 
                of an individual shall be treated as a child of 
                such individual by blood.
          (2) Attribution from partnerships, estates, trusts, 
        and corporations.--
                  (A) From partnerships and estates.--Stock 
                owned, directly or indirectly, by or for a 
                partnership or estate shall be considered as 
                owned proportionately by its partners or 
                beneficiaries.
                  (B) From trusts.--
                          (i) Stock owned, directly or 
                        indirectly, by or for a trust (other 
                        than an employees' trust described in 
                        section 401(a) which is exempt from tax 
                        under section 501(a)) shall be 
                        considered as owned by its 
                        beneficiaries in proportion to the 
                        actuarial interest of such 
                        beneficiaries in such trust.
                          (ii) Stock owned, directly or 
                        indirectly, by or for any portion of a 
                        trust of which a person is considered 
                        the owner under subpart E of part I of 
                        subchapter J (relating to grantors and 
                        others treated as substantial owners) 
                        shall be considered as owned by such 
                        person.
                  (C) From corporations.--If 50 percent or more 
                in value of the stock in a corporation is 
                owned, directly or indirectly, by or for any 
                person, such person shall be considered as 
                owning the stock owned, directly or indirectly, 
                by or for such corporation, in that proportion 
                which the value of the stock which such person 
                so owns bears to the value of all the stock in 
                such corporation.
          (3) Attribution to partnerships, estates, trusts, and 
        corporations.--
                  (A) To partnerships and estates.--Stock 
                owned, directly or indirectly, by or for a 
                partner or a beneficiary of an estate shall be 
                considered as owned by the partnership or 
                estate.
                  (B) To trusts.--
                          (i) Stock owned, directly or 
                        indirectly, by or for a beneficiary of 
                        a trust (other than an employees' trust 
                        described in section 401(a) which is 
                        exempt from tax under section 501(a)) 
                        shall be considered as owned by the 
                        trust, unless such beneficiary's 
                        interest in the trust is a remote 
                        contingent interest. For purposes of 
                        this clause, a contingent interest of a 
                        beneficiary in a trust shall be 
                        considered remote if, under the maximum 
                        exercise of discretion by the trustee 
                        in favor of such beneficiary, the value 
                        of such interest, computed actuarially, 
                        is 5 percent or less of the value of 
                        the trust property.
                          (ii) Stock owned, directly or 
                        indirectly, by or for a person who is 
                        considered the owner of any portion of 
                        a trust under subpart E of part I of 
                        subchapter J (relating to grantors and 
                        others treated as substantial owners) 
                        shall be considered as owned by the 
                        trust.
                  (C) To corporations.--If 50 percent or more 
                in value of the stock in a corporation is 
                owned, directly or indirectly, by or for any 
                person, such corporation shall be considered as 
                owning the stock owned, directly or indirectly, 
                by or for such person.
          (4) Options.--If any person has an option to acquire 
        stock, such stock shall be considered as owned by such 
        person. For purposes of this paragraph, an option to 
        acquire such an option, and each one of a series of 
        such options, shall be considered as an option to 
        acquire such stock.
          (5) Operating rules.--
                  (A) In general.--Except as provided in 
                subparagraphs (B) and (C), stock constructively 
                owned by a person by reason of the application 
                of paragraph (1), (2), (3), or (4), shall, for 
                purposes of applying paragraphs (1), (2), (3), 
                and (4), be considered as actually owned by 
                such person.
                  (B) Members of family.--Stock constructively 
                owned by an individual by reason of the 
                application of paragraph (1) shall not be 
                considered as owned by him for purposes of 
                again applying paragraph (1) in order to make 
                another the constructive owner of such stock.
                  (C) Partnerships, estates, trusts, and 
                corporations.--Stock constructively owned by a 
                partnership, estate, trust, or corporation by 
                reason of the application of paragraph (3) 
                shall not be considered as owned by it for 
                purposes of applying paragraph (2) in order to 
                make another the constructive owner of such 
                stock.
                  (D) Option rule in lieu of family rule.--For 
                purposes of this paragraph, if stock may be 
                considered as owned by an individual under 
                paragraph (1) or (4), it shall be considered as 
                owned by him under paragraph (4).
                  (E) S corporation treated as partnership.--
                For purposes of this subsection--
                          (i) an S corporation shall be treated 
                        as a partnership, and
                          (ii) any shareholder of the S 
                        corporation shall be treated as a 
                        partner of such partnership.
                The preceding sentence shall not apply for 
                purposes of determining whether stock in the S 
                corporation is constructively owned by any 
                person.
  (b) Cross references.--For provisions to which the rules 
contained in subsection (a) apply, see--
                  (1) section 302 (relating to redemption of 
                stock);
                  (2) section 304 (relating to redemption by 
                related corporations);
                  (3) section 306(b)(1)(A) (relating to 
                disposition of section 306 stock);
                  (4) section 338(h)(3) (defining purchase);
                  (5) section 382(l)(3) (relating to special 
                limitations on net operating loss carryovers);
                  (6) section 856(d) (relating to definition of 
                rents from real property in the case of real 
                estate investment trusts);
                  (7) section 958(b) (relating to constructive 
                ownership rules with respect to controlled 
                foreign corporations); and
                  (8) section 6038(e)(2) (relating to 
                information with respect to certain foreign 
                corporations).

Subchapter D--DEFERRED COMPENSATION, ETC.

           *       *       *       *       *       *       *


PART I--PENSION, PROFIT-SHARING, STOCK BONUS PLANS, ETC.

           *       *       *       *       *       *       *


Subpart A--GENERAL RULE

           *       *       *       *       *       *       *


SEC. 401. QUALIFIED PENSION, PROFIT-SHARING, AND STOCK BONUS PLANS.

  (a) Requirements for qualification.--A trust created or 
organized in the United States and forming part of a stock 
bonus, pension, or profit-sharing plan of an employer for the 
exclusive benefit of his employees or their beneficiaries shall 
constitute a qualified trust under this section--
          (1) if contributions are made to the trust by such 
        employer, or employees, or both, or by another employer 
        who is entitled to deduct his contributions under 
        section 404(a)(3)(B) (relating to deduction for 
        contributions to profit-sharing and stock bonus plans), 
        or by a charitable remainder trust pursuant to a 
        qualified gratuitous transfer (as defined in section 
        664(g)(1)), for the purpose of distributing to such 
        employees or their beneficiaries the corpus and income 
        of the fund accumulated by the trust in accordance with 
        such plan;
          (2) if under the trust instrument it is impossible, 
        at any time prior to the satisfaction of all 
        liabilities with respect to employees and their 
        beneficiaries under the trust, for any part of the 
        corpus or income to be (within the taxable year or 
        thereafter) used for, or diverted to, purposes other 
        than for the exclusive benefit of his employees or 
        their beneficiaries (but this paragraph shall not be 
        construed, in the case of a multiemployer plan, to 
        prohibit the return of a contribution within 6 months 
        after the plan administrator determines that the 
        contribution was made by a mistake of fact or law 
        (other than a mistake relating to whether the plan is 
        described in section 401(a) or the trust which is part 
        of such plan is exempt from taxation under section 
        501(a), or the return of any withdrawal liability 
        payment determined to be an overpayment within 6 months 
        of such determination));
          (3) if the plan of which such trust is a part 
        satisfies the requirements of section 410 (relating to 
        minimum participation standards); and
          (4) if the contributions or benefits provided under 
        the plan do not discriminate in favor of highly 
        compensated employees (within the meaning of section 
        414(q)). For purposes of this paragraph, there shall be 
        excluded from consideration employees described in 
        section 410(b)(3)(A) and (C).
          (5) Special rules relating to nondiscrimination 
        requirements.--
                  (A) Salaried or clerical employees.--A 
                classification shall not be considered 
                discriminatory within the meaning of paragraph 
                (4) or section 410(b)(2)(A)(i) merely because 
                it is limited to salaried or clerical 
                employees.
                  (B) Contributions and benefits may bear 
                uniform relationship to compensation.--A plan 
                shall not be considered discriminatory within 
                the meaning of paragraph (4) merely because the 
                contributions or benefits of, or on behalf of, 
                the employees under the plan bear a uniform 
                relationship to the compensation (within the 
                meaning of section 414(s)) of such employees.
                  (C) Certain disparity permitted.--A plan 
                shall not be considered discriminatory within 
                the meaning of paragraph (4) merely because the 
                contributions or benefits of, or on behalf of, 
                the employees under the plan favor highly 
                compensated employees (as defined in section 
                414(q)) in the manner permitted under 
                subsection (l).
                  (D) Integrated defined benefit plan.--
                          (i) In general.--A defined benefit 
                        plan shall not be considered 
                        discriminatory within the meaning of 
                        paragraph (4) merely because the plan 
                        provides that the employer-derived 
                        accrued retirement benefit for any 
                        participant under the plan may not 
                        exceed the excess (if any) of--
                                  (I) the participant's final 
                                pay with the employer, over
                                  (II) the employer-derived 
                                retirement benefit created 
                                under Federal law attributable 
                                to service by the participant 
                                with the employer.
                 For purposes of this clause, the employer-
                derived retirement benefit created under 
                Federal law shall be treated as accruing 
                ratably over 35 years.
                          (ii) Final pay.--For purposes of this 
                        subparagraph, the participant's final 
                        pay is the compensation (as defined in 
                        section 414(q)(4)) paid to the 
                        participant by the employer for any 
                        year--
                                  (I) which ends during the 5-
                                year period ending with the 
                                year in which the participant 
                                separated from service for the 
                                employer, and
                                  (II) for which the 
                                participant's total 
                                compensation from the employer 
                                was highest.
                  (E) 2 or more plans treated as single plan.--
                For purposes of determining whether 2 or more 
                plans of an employer satisfy the requirements 
                of paragraph (4) when considered as a single 
                plan--
                          (i) Contributions.--If the amount of 
                        contributions on behalf of the 
                        employees allowed as a deduction under 
                        section 404 for the taxable year with 
                        respect to such plans, taken together, 
                        bears a uniform relationship to the 
                        compensation (within the meaning of 
                        section 414(s)) of such employees, the 
                        plans shall not be considered 
                        discriminatory merely because the 
                        rights of employees to, or derived 
                        from, the employer contributions under 
                        the separate plans do not become 
                        nonforfeitable at the same rate.
                          (ii) Benefits.--If the employees' 
                        rights to benefits under the separate 
                        plans do not become nonforfeitable at 
                        the same rate, but the levels of 
                        benefits provided by the separate plans 
                        satisfy the requirements of regulations 
                        prescribed by the Secretary to take 
                        account of the differences in such 
                        rates, the plans shall not be 
                        considered discriminatory merely 
                        because of the difference in such 
                        rates.
                  (F) Social security retirement age.--For 
                purposes of testing for discrimination under 
                paragraph (4)--
                          (i) the social security retirement 
                        age (as defined in section 415(b)(8)) 
                        shall be treated as a uniform 
                        retirement age, and
                          (ii) subsidized early retirement 
                        benefits and joint and survivor 
                        annuities shall not be treated as being 
                        unavailable to employees on the same 
                        terms merely because such benefits or 
                        annuities are based in whole or in part 
                        on an employee's social security 
                        retirement age (as so defined).
                  (G) Governmental plans.--Paragraphs (3) and 
                (4) shall not apply to a governmental plan 
                (within the meaning of section 414(d)).
          (6) A plan shall be considered as meeting the 
        requirements of paragraph (3) during the whole of any 
        taxable year of the plan if on one day in each quarter 
        it satisfied such requirements.
          (7) A trust shall not constitute a qualified trust 
        under this section unless the plan of which such trust 
        is a part satisfies the requirements of section 411 
        (relating to minimum vesting standards).
          (8) A trust forming part of a defined benefit plan 
        shall not constitute a qualified trust under this 
        section unless the plan provides that forfeitures must 
        not be applied to increase the benefits any employee 
        would otherwise receive under the plan.
          (9) Required distributions.--
                  (A) In general.--A trust shall not constitute 
                a qualified trust under this subsection unless 
                the plan provides that the entire interest of 
                each employee--
                          (i) will be distributed to such 
                        employee not later than the required 
                        beginning date, or
                          (ii) will be distributed, beginning 
                        not later than the required beginning 
                        date, in accordance with regulations, 
                        over the life of such employee or over 
                        the lives of such employee and a 
                        designated beneficiary (or over a 
                        period not extending beyond the life 
                        expectancy of such employee or the life 
                        expectancy of such employee and a 
                        designated beneficiary).
                  (B) Required distribution where employee dies 
                before entire interest is distributed.--
                          (i) Where distributions have begun 
                        under subparagraph (A)(ii).--A trust 
                        shall not constitute a qualified trust 
                        under this section unless the plan 
                        provides that if--
                                  (I) the distribution of the 
                                employee's interest has begun 
                                in accordance with subparagraph 
                                (A)(ii), and
                                  (II) the employee dies before 
                                his entire interest has been 
                                distributed to him,
                 the remaining portion of such interest will be 
                distributed at least as rapidly as under the 
                method of distributions being used under 
                subparagraph (A)(ii) as of the date of his 
                death.
                          (ii) 5-year rule for other cases.--A 
                        trust shall not constitute a qualified 
                        trust under this section unless the 
                        plan provides that, if an employee dies 
                        before the distribution of the 
                        employee's interest has begun in 
                        accordance with subparagraph (A)(ii), 
                        the entire interest of the employee 
                        will be distributed within 5 years 
                        after the death of such employee.
                          (iii) Exception to 5-year rule for 
                        certain amounts payable over life of 
                        beneficiary.--If--
                                  (I) any portion of the 
                                employee's interest is payable 
                                to (or for the benefit of) a 
                                designated beneficiary,
                                  (II) such portion will be 
                                distributed (in accordance with 
                                regulations) over the life of 
                                such designated beneficiary (or 
                                over a period not extending 
                                beyond the life expectancy of 
                                such beneficiary), and
                                  (III) such distributions 
                                begin not later than 1 year 
                                after the date of the 
                                employee's death or such later 
                                date as the Secretary may by 
                                regulations prescribe,
                 for purposes of clause (ii), the portion 
                referred to in subclause (I) shall be treated 
                as distributed on the date on which such 
                distributions begin.
                          (iv) Special rule for surviving 
                        spouse of employee.--If the designated 
                        beneficiary referred to in clause 
                        (iii)(I) is the surviving spouse of the 
                        employee--
                                  (I) the date on which the 
                                distributions are required to 
                                begin under clause (iii)(III) 
                                shall not be earlier than the 
                                date on which the employee 
                                would have attained age 701/2, 
                                and
                                  (II) if the surviving spouse 
                                dies before the distributions 
                                to such spouse begin, this 
                                subparagraph shall be applied 
                                as if the surviving spouse were 
                                the employee.
                  (C) Required beginning date.--For purposes of 
                this paragraph--
                          (i) In general.--The term ``required 
                        beginning date'' means April 1 of the 
                        calendar year following the later of--
                                  (I) the calendar year in 
                                which the employee attains age 
                                701/2, or
                                  (II) the calendar year in 
                                which the employee retires.
                          (ii) Exception.--Subclause (II) of 
                        clause (i) shall not apply--
                                  (I) except as provided in 
                                section 409(d), in the case of 
                                an employee who is a 5-percent 
                                owner (as defined in section 
                                416) with respect to the plan 
                                year ending in the calendar 
                                year in which the employee 
                                attains age 701/2, or
                                  (II) for purposes of section 
                                408(a)(6) or (b)(3).
                          (iii) Actuarial adjustment.--In the 
                        case of an employee to whom clause 
                        (i)(II) applies who retires in a 
                        calendar year after the calendar year 
                        in which the employee attains age 701/
                        2, the employee's accrued benefit shall 
                        be actuarially increased to take into 
                        account the period after age 701/2 in 
                        which the employee was not receiving 
                        any benefits under the plan.
                          (iv) Exception for governmental and 
                        church plans.--Clauses (ii) and (iii) 
                        shall not apply in the case of a 
                        governmental plan or church plan. For 
                        purposes of this clause, the term 
                        ``church plan'' means a plan maintained 
                        by a church for church employees, and 
                        the term ``church'' means any church 
                        (as defined in section 3121(w)(3)(A)) 
                        or qualified church-controlled 
                        organization (as defined in section 
                        3121(w)(3)(B)).
                  (D) Life expectancy.--For purposes of this 
                paragraph, the life expectancy of an employee 
                and the employee's spouse (other than in the 
                case of a life annuity) may be redetermined but 
                not more frequently than annually.
                  (E) Designated beneficiary.--For purposes of 
                this paragraph, the term ``designated 
                beneficiary'' means any individual designated 
                as a beneficiary by the employee.
                  (F) Treatment of payments to children.--Under 
                regulations prescribed by the Secretary, for 
                purposes of this paragraph, any amount paid to 
                a child shall be treated as if it had been paid 
                to the surviving spouse if such amount will 
                become payable to the surviving spouse upon 
                such child reaching majority (or other 
                designated event permitted under regulations).
                  (G) Treatment of incidental death benefit 
                distributions.--For purposes of this title, any 
                distribution required under the incidental 
                death benefit requirements of this subsection 
                shall be treated as a distribution required 
                under this paragraph.
          (10) Other requirements.--
                  (A) Plans benefiting owner-employees.--In the 
                case of any plan which provides contributions 
                or benefits for employees some or all of whom 
                are owner-employees (as defined in subsection 
                (c)(3)), a trust forming part of such plan 
                shall constitute a qualified trust under this 
                section only if the requirements of subsection 
                (d) are also met.
                  (B) Top-heavy plans.--
                          (i) In general.--In the case of any 
                        top-heavy plan, a trust forming part of 
                        such plan shall constitute a qualified 
                        trust under this section only if the 
                        requirements of section 416 are met.
                          (ii) Plans which may become top-
                        heavy.--Except to the extent provided 
                        in regulations, a trust forming part of 
                        a plan (whether or not a top-heavy 
                        plan) shall constitute a qualified 
                        trust under this section only if such 
                        plan contains provisions--
                                  (I) which will take effect if 
                                such plan becomes a top-heavy 
                                plan, and
                                  (II) which meet the 
                                requirements of section 416.
                          (iii) Exemption for governmental 
                        plans.--This subparagraph shall not 
                        apply to any governmental plan.
          (11) Requirement of joint and survivor annuity and 
        preretirement survivor annuity.--
                  (A) In general.--In the case of any plan to 
                which this paragraph applies, except as 
                provided in section 417, a trust forming part 
                of such plan shall not constitute a qualified 
                trust under this section unless--
                          (i) in the case of a vested 
                        participant who does not die before the 
                        annuity starting date, the accrued 
                        benefit payable to such participant is 
                        provided in the form of a qualified 
                        joint and survivor annuity, and
                          (ii) in the case of a vested 
                        participant who dies before the annuity 
                        starting date and who has a surviving 
                        spouse, a qualified preretirement 
                        survivor annuity is provided to the 
                        surviving spouse of such participant.
                  (B) Plans to which paragraph applies.--This 
                paragraph shall apply to--
                          (i) any defined benefit plan,
                          (ii) any defined contribution plan 
                        which is subject to the funding 
                        standards of section 412, and
                          (iii) any participant under any other 
                        defined contribution plan unless--
                                  (I) such plan provides that 
                                the participant's 
                                nonforfeitable accrued benefit 
                                (reduced by any security 
                                interest held by the plan by 
                                reason of a loan outstanding to 
                                such participant) is payable in 
                                full, on the death of the 
                                participant, to the 
                                participant's surviving spouse 
                                (or, if there is no surviving 
                                spouse or the surviving spouse 
                                consents in the manner required 
                                under section 417(a)(2), to a 
                                designated beneficiary),
                                  (II) such participant does 
                                not elect a payment of benefits 
                                in the form of a life annuity, 
                                and
                                  (III) with respect to such 
                                participant, such plan is not a 
                                direct or indirect transferee 
                                (in a transfer after December 
                                31, 1984) of a plan which is 
                                described in clause (i) or (ii) 
                                or to which this clause applied 
                                with respect to the 
                                participant.
                Clause (iii)(III) shall apply only with respect 
                to the transferred assets (and income 
                therefrom) if the plan separately accounts for 
                such assets and any income therefrom.
                  (C) Exception for certain ESOP benefits.--
                          (i) In general.--In the case of--
                                  (I) a tax credit employee 
                                stock ownership plan (as 
                                defined in section 409(a)), or
                                  (II) an employee stock 
                                ownership plan (as defined in 
                                section 4975(e)(7)),
                 subparagraph (A) shall not apply to that 
                portion of the employee's accrued benefit to 
                which the requirements of section 409(h) apply.
                          (ii) Nonforfeitable benefit must be 
                        paid in full, etc.--In the case of any 
                        participant, clause (i) shall apply 
                        only if the requirements of subclauses 
                        (I), (II), and (III) of subparagraph 
                        (B)(iii) are met with respect to such 
                        participant.
                  (D) Special rule where participant and spouse 
                married less than 1 year.--A plan shall not be 
                treated as failing to meet the requirements of 
                subparagraphs (B)(iii) or (C) merely because 
                the plan provides that benefits will not be 
                payable to the surviving spouse of the 
                participant unless the participant and such 
                spouse had been married throughout the 1-year 
                period ending on the earlier of the 
                participant's annuity starting date or the date 
                of the participant's death.
                  (E) Exception for plans described in section 
                404(c).--This paragraph shall not apply to a 
                plan which the Secretary has determined is a 
                plan described in section 404(c) (or a 
                continuation thereof) in which participation is 
                substantially limited to individuals who, 
                before January 1, 1976, ceased employment 
                covered by the plan.
                  (F) Cross reference.--For--
                          (i) provisions under which 
                        participants may elect to waive the 
                        requirements of this paragraph, and
                          (ii) other definitions and special 
                        rules for purposes of this paragraph,
                see section 417.
          (12) A trust shall not constitute a qualified trust 
        under this section unless the plan of which such trust 
        is a part provides that in the case of any merger or 
        consolidation with, or transfer of assets or 
        liabilities to, any other plan after September 2, 1974, 
        each participant in the plan would (if the plan then 
        terminated) receive a benefit immediately after the 
        merger, consolidation, or transfer which is equal to or 
        greater than the benefit he would have been entitled to 
        receive immediately before the merger, consolidation, 
        or transfer (if the plan had then terminated). The 
        preceding sentence does not apply to any multiemployer 
        plan with respect to any transaction to the extent that 
        participants either before or after the transaction are 
        covered under a multiemployer plan to which title IV of 
        the Employee Retirement Income Security Act of 1974 
        applies.
          (13) Assignment and alienation.--
                  (A) In general.--A trust shall not constitute 
                a qualified trust under this section unless the 
                plan of which such trust is a part provides 
                that benefits provided under the plan may not 
                be assigned or alienated. For purposes of the 
                preceding sentence, there shall not be taken 
                into account any voluntary and revocable 
                assignment of not to exceed 10 percent of any 
                benefit payment made by any participant who is 
                receiving benefits under the plan unless the 
                assignment or alienation is made for purposes 
                of defraying plan administration costs. For 
                purposes of this paragraph a loan made to a 
                participant or beneficiary shall not be treated 
                as an assignment or alienation if such loan is 
                secured by the participant's accrued 
                nonforfeitable benefit and is exempt from the 
                tax imposed by section 4975 (relating to tax on 
                prohibited transactions) by reason of section 
                4975(d)(1). This paragraph shall take effect on 
                January 1, 1976 and shall not apply to 
                assignments which were irrevocable on September 
                2, 1974.
                  (B) Special rules for domestic relations 
                orders.--Subparagraph (A) shall apply to the 
                creation, assignment, or recognition of a right 
                to any benefit payable with respect to a 
                participant pursuant to a domestic relations 
                order, except that subparagraph (A) shall not 
                apply if the order is determined to be a 
                qualified domestic relations order.
                  (C) Special rule for certain judgments and 
                settlements.--Subparagraph (A) shall not apply 
                to any offset of a participant's benefits 
                provided under a plan against an amount that 
                the participant is ordered or required to pay 
                to the plan if--
                          (i) the order or requirement to pay 
                        arises--
                                  (I) under a judgment of 
                                conviction for a crime 
                                involving such plan,
                                  (II) under a civil judgment 
                                (including a consent order or 
                                decree) entered by a court in 
                                an action brought in connection 
                                with a violation (or alleged 
                                violation) of part 4 of 
                                subtitle B of title I of the 
                                Employee Retirement Income 
                                Security Act of 1974, or
                                  (III) pursuant to a 
                                settlement agreement between 
                                the Secretary of Labor and the 
                                participant, or a settlement 
                                agreement between the Pension 
                                Benefit Guaranty Corporation 
                                and the participant, in 
                                connection with a violation (or 
                                alleged violation) of part 4 of 
                                such subtitle by a fiduciary or 
                                any other person,
                          (ii) the judgment, order, decree, or 
                        settlement agreement expressly provides 
                        for the offset of all or part of the 
                        amount ordered or required to be paid 
                        to the plan against the participant's 
                        benefits provided under the plan, and
                          (iii) in a case in which the survivor 
                        annuity requirements of section 
                        401(a)(11) apply with respect to 
                        distributions from the plan to the 
                        participant, if the participant has a 
                        spouse at the time at which the offset 
                        is to be made--
                                  (I) either such spouse has 
                                consented in writing to such 
                                offset and such consent is 
                                witnessed by a notary public or 
                                representative of the plan (or 
                                it is established to the 
                                satisfaction of a plan 
                                representative that such 
                                consent may not be obtained by 
                                reason of circumstances 
                                described in section 
                                417(a)(2)(B)), or an election 
                                to waive the right of the 
                                spouse to either a qualified 
                                joint and survivor annuity or a 
                                qualified preretirement 
                                survivor annuity is in effect 
                                in accordance with the 
                                requirements of section 417(a),
                                  (II) such spouse is ordered 
                                or required in such judgment, 
                                order, decree, or settlement to 
                                pay an amount to the plan in 
                                connection with a violation of 
                                part 4 of such subtitle, or
                                  (III) in such judgment, 
                                order, decree, or settlement, 
                                such spouse retains the right 
                                to receive the survivor annuity 
                                under a qualified joint and 
                                survivor annuity provided 
                                pursuant to section 
                                401(a)(11)(A)(i) and under a 
                                qualified preretirement 
                                survivor annuity provided 
                                pursuant to section 
                                401(a)(11)(A)(ii), determined 
                                in accordance with subparagraph 
                                (D).
                A plan shall not be treated as failing to meet 
                the requirements of this subsection, subsection 
                (k), section 403(b), or section 409(d) solely 
                by reason of an offset described in this 
                subparagraph.
                  (D) Survivor annuity.--
                          (i) In general.--The survivor annuity 
                        described in subparagraph (C)(iii)(III) 
                        shall be determined as if--
                                  (I) the participant 
                                terminated employment on the 
                                date of the offset,
                                  (II) there was no offset,
                                  (III) the plan permitted 
                                commencement of benefits only 
                                on or after normal retirement 
                                age,
                                  (IV) the plan provided only 
                                the minimum-required qualified 
                                joint and survivor annuity, and
                                  (V) the amount of the 
                                qualified preretirement 
                                survivor annuity under the plan 
                                is equal to the amount of the 
                                survivor annuity payable under 
                                the minimum-required qualified 
                                joint and survivor annuity.
                          (ii) Definition.--For purposes of 
                        this subparagraph, the term ``minimum-
                        required qualified joint and survivor 
                        annuity'' means the qualified joint and 
                        survivor annuity which is the actuarial 
                        equivalent of the participant's accrued 
                        benefit (within the meaning of section 
                        411(a)(7)) and under which the survivor 
                        annuity is 50 percent of the amount of 
                        the annuity which is payable during the 
                        joint lives of the participant and the 
                        spouse.
          (14) A trust shall not constitute a qualified trust 
        under this section unless the plan of which such trust 
        is a part provides that, unless the participant 
        otherwise elects, the payment of benefits under the 
        plan to the participant will begin not later than the 
        60th day after the latest of the close of the plan year 
        in which--
                  (A) the date on which the participant attains 
                the earlier of age 65 or the normal retirement 
                age specified under the plan,
                  (B) occurs the 10th anniversary of the year 
                in which the participant commenced 
                participation in the plan, or
                  (C) the participant terminates his service 
                with the employer.
        In the case of a plan which provides for the payment of 
        an early retirement benefit, a trust forming a part of 
        such plan shall not constitute a qualified trust under 
        this section unless a participant who satisfied the 
        service requirements for such early retirement benefit, 
        but separated from the service (with any nonforfeitable 
        right to an accrued benefit) before satisfying the age 
        requirement for such early retirement benefit, is 
        entitled upon satisfaction of such age requirement to 
        receive a benefit not less than the benefit to which he 
        would be entitled at the normal retirement age, 
        actuarially, reduced under regulations prescribed by 
        the Secretary.
          (15) A trust shall not constitute a qualified trust 
        under this section unless under the plan of which such 
        trust is a part--
                  (A) in the case of a participant or 
                beneficiary who is receiving benefits under 
                such plan, or
                  (B) in the case of a participant who is 
                separated from the service and who has 
                nonforfeitable rights to benefits,
        such benefits are not decreased by reason of any 
        increase in the benefit levels payable under title II 
        of the Social Security Act or any increase in the wage 
        base under such title II, if such increase takes place 
        after September 2, 1974, or (if later) the earlier of 
        the date of first receipt of such benefits or the date 
        of such separation, as the case may be.
          (16) A trust shall not constitute a qualified trust 
        under this section if the plan of which such trust is a 
        part provides for benefits or contributions which 
        exceed the limitations of section 415.
          (17) Compensation limit.--
                  (A) In general.--A trust shall not constitute 
                a qualified trust under this section unless, 
                under the plan of which such trust is a part, 
                the annual compensation of each employee taken 
                into account under the plan for any year does 
                not exceed $200,000.
                  (B) Cost-of-living adjustment.--The Secretary 
                shall adjust annually the $200,000 amount in 
                subparagraph (A) for increases in the cost-of-
                living at the same time and in the same manner 
                as adjustments under section 415(d); except 
                that the base period shall be the calendar 
                quarter beginning July 1, 2001, and any 
                increase which is not a multiple of $5,000 
                shall be rounded to the next lowest multiple of 
                $5,000.
          (19) A trust shall not constitute a qualified trust 
        under this section if under the plan of which such 
        trust is a part any part of a participant's accrued 
        benefit derived from employer contributions (whether or 
        not otherwise nonforfeitable), is forfeitable solely 
        because of withdrawal by such participant of any amount 
        attributable to the benefit derived from contributions 
        made by such participant. The preceding sentence shall 
        not apply to the accrued benefit of any participant 
        unless, at the time of such withdrawal, such 
        participant has a nonforfeitable right to at least 50 
        percent of such accrued benefit (as determined under 
        section 411). The first sentence of this paragraph 
        shall not apply to the extent that an accrued benefit 
        is permitted to be forfeited in accordance with section 
        411(a)(3)(D)(iii) (relating to proportional forfeitures 
        of benefits accrued before September 2, 1974, in the 
        event of withdrawal of certain mandatory 
        contributions).
          (20) A trust forming part of a pension plan shall not 
        be treated as failing to constitute a qualified trust 
        under this section merely because the pension plan of 
        which such trust is a part makes 1 or more 
        distributions within 1 taxable year to a distributee on 
        account of a termination of the plan of which the trust 
        is a part, or in the case of a profit-sharing or stock 
        bonus plan, a complete discontinuance of contributions 
        under such plan. This paragraph shall not apply to a 
        defined benefit plan unless the employer maintaining 
        such plan files a notice with the Pension Benefit 
        Guaranty Corporation (at the time and in the manner 
        prescribed by the Pension Benefit Guaranty Corporation) 
        notifying the Corporation of such payment or 
        distribution and the Corporation has approved such 
        payment or distribution or, within 90 days after the 
        date on which such notice was filed, has failed to 
        disapprove such payment or distribution. For purposes 
        of this paragraph, rules similar to the rules of 
        section 402(a)(6)(B) (as in effect before its repeal by 
        section 521 of the Unemployment Compensation Amendments 
        of 1992) shall apply.
          (22) If a defined contribution plan (other than a 
        profit-sharing plan)--
                  (A) is established by an employer whose stock 
                is not readily tradable on an established 
                market, and
                  (B) after acquiring securities of the 
                employer, more than 10 percent of the total 
                assets of the plan are securities of the 
                employer,
        any trust forming part of such plan shall not 
        constitute a qualified trust under this section unless 
        the plan meets the requirements of subsection (e) of 
        section 409. The requirements of subsection (e) of 
        section 409 shall not apply to any employees of an 
        employer who are participants in any defined 
        contribution plan established and maintained by such 
        employer if the stock of such employer is not readily 
        tradable on an established market and the trade or 
        business of such employer consists of publishing on a 
        regular basis a newspaper for general circulation. For 
        purposes of the preceding sentence, subsections (b), 
        (c), (m), and (o) of section 414 shall not apply except 
        for determining whether stock of the employer is not 
        readily tradable on an established market.
          (23) A stock bonus plan shall not be treated as 
        meeting the requirements of this section unless such 
        plan meets the requirements of subsections (h) and (o) 
        of section 409, except that in applying section 409(h) 
        for purposes of this paragraph, the term ``employer 
        securities'' shall include any securities of the 
        employer held by the plan.
          (24) Any group trust which otherwise meets the 
        requirements of this section shall not be treated as 
        not meeting such requirements on account of the 
        participation or inclusion in such trust of the moneys 
        of any plan or governmental unit described in section 
        818(a)(6).
          (25) Requirement that actuarial assumptions be 
        specified.--A defined benefit plan shall not be treated 
        as providing definitely determinable benefits unless, 
        whenever the amount of any benefit is to be determined 
        on the basis of actuarial assumptions, such assumptions 
        are specified in the plan in a way which precludes 
        employer discretion.
          (26) Additional participation requirements.--
                  (A) In general.--In the case of a trust which 
                is a part of a defined benefit plan, such trust 
                shall not constitute a qualified trust under 
                this subsection unless on each day of the plan 
                year such trust benefits at least the lesser 
                of--
                          (i) 50 employees of the employer, or
                          (ii) the greater of--
                                  (I) 40 percent of all 
                                employees of the employer, or
                                  (II) 2 employees (or if there 
                                is only 1 employee, such 
                                employee).
                  (B) Treatment of excludable employees.--
                          (i) In general.--A plan may exclude 
                        from consideration under this paragraph 
                        employees described in paragraphs (3) 
                        and (4)(A) of section 410(b).
                          (ii) Separate application for certain 
                        excludable employees.--If employees 
                        described in section 410(b)(4)(B) are 
                        covered under a plan which meets the 
                        requirements of subparagraph (A) 
                        separately with respect to such 
                        employees, such employees may be 
                        excluded from consideration in 
                        determining whether any plan of the 
                        employer meets such requirements if--
                                  (I) the benefits for such 
                                employees are provided under 
                                the same plan as benefits for 
                                other employees,
                                  (II) the benefits provided to 
                                such employees are not greater 
                                than comparable benefits 
                                provided to other employees 
                                under the plan, and
                                  (III) no highly compensated 
                                employee (within the meaning of 
                                section 414(q)) is included in 
                                the group of such employees for 
                                more than 1 year.
                  (C) Special rule for collective bargaining 
                units.--Except to the extent provided in 
                regulations, a plan covering only employees 
                described in section 410(b)(3)(A) may exclude 
                from consideration any employees who are not 
                included in the unit or units in which the 
                covered employees are included.
                  (D) Paragraph not to apply to multiemployer 
                plans.--Except to the extent provided in 
                regulations, this paragraph shall not apply to 
                employees in a multiemployer plan (within the 
                meaning of section 414(f)) who are covered by 
                collective bargaining agreements.
                  (E) Special rule for certain dispositions or 
                acquisitions.--Rules similar to the rules of 
                section 410(b)(6)(C) shall apply for purposes 
                of this paragraph.
                  (F) Separate lines of business.--At the 
                election of the employer and with the consent 
                of the Secretary, this paragraph may be applied 
                separately with respect to each separate line 
                of business of the employer. For purposes of 
                this paragraph, the term ``separate line of 
                business'' has the meaning given such term by 
                section 414(r) (without regard to paragraph 
                (2)(A) or (7) thereof).
                  (G) Exception for governmental plans.--This 
                paragraph shall not apply to a governmental 
                plan (within the meaning of section 414(d)).
                  (H) Regulations.--The Secretary may by 
                regulation provide that any separate benefit 
                structure, any separate trust, or any other 
                separate arrangement is to be treated as a 
                separate plan for purposes of applying this 
                paragraph.
          (27) Determinations as to profit-sharing plans.--
                  (A) Contributions need not be based on 
                profits.--The determination of whether the plan 
                under which any contributions are made is a 
                profit-sharing plan shall be made without 
                regard to current or accumulated profits of the 
                employer and without regard to whether the 
                employer is a tax-exempt organization.
                  (B) Plan must designate type.--In the case of 
                a plan which is intended to be a money purchase 
                pension plan or a profit-sharing plan, a trust 
                forming part of such plan shall not constitute 
                a qualified trust under this subsection unless 
                the plan designates such intent at such time 
                and in such manner as the Secretary may 
                prescribe.
          (28) Additional requirements relating to employee 
        stock ownership plans.--
                  (A) In general.--In the case of a trust which 
                is part of an employee stock ownership plan 
                (within the meaning of section 4975(e)(7)) or a 
                plan which meets the requirements of section 
                409(a), such trust shall not constitute a 
                qualified trust under this section unless such 
                plan meets the requirements of subparagraphs 
                (B) and (C).
                  (B) Diversification of investments.--
                          (i) In general.--A plan meets the 
                        requirements of this subparagraph if 
                        each qualified participant in the plan 
                        may elect within 90 days after the 
                        close of each plan year in the 
                        qualified election period to direct the 
                        plan as to the investment of at least 
                        25 percent of the participant's account 
                        in the plan (to the extent such portion 
                        exceeds the amount to which a prior 
                        election under this subparagraph 
                        applies). In the case of the election 
                        year in which the participant can make 
                        his last election, the preceding 
                        sentence shall be applied by 
                        substituting ``50 percent'' for ``25 
                        percent''.
                          (ii) Method of meeting 
                        requirements.--A plan shall be treated 
                        as meeting the requirements of clause 
                        (i) if--
                                  (I) the portion of the 
                                participant's account covered 
                                by the election under clause 
                                (i) is distributed within 90 
                                days after the period during 
                                which the election may be made, 
                                or
                                  (II) the plan offers at least 
                                3 investment options (not 
                                inconsistent with regulations 
                                prescribed by the Secretary) to 
                                each participant making an 
                                election under clause (i) and 
                                within 90 days after the period 
                                during which the election may 
                                be made, the plan invests the 
                                portion of the participant's 
                                account covered by the election 
                                in accordance with such 
                                election.
                          (iii) Qualified participant.--For 
                        purposes of this subparagraph, the term 
                        ``qualified participant'' means any 
                        employee who has completed at least 10 
                        years of participation under the plan 
                        and has attained age 55.
                          (iv) Qualified election period.--For 
                        purposes of this subparagraph, the term 
                        ``qualified election period'' means the 
                        6-plan-year period beginning with the 
                        later of--
                                  (I) the 1st plan year in 
                                which the individual first 
                                became a qualified participant, 
                                or
                                  (II) the 1st plan year 
                                beginning after December 31, 
                                1986.
                 For purposes of the preceding sentence, an 
                employer may elect to treat an individual first 
                becoming a qualified participant in the 1st 
                plan year beginning in 1987 as having become a 
                participant in the 1st plan year beginning in 
                1988.
                          (v) Exception.--This subparagraph 
                        shall not apply to an applicable 
                        defined contribution plan (as defined 
                        in paragraph (35)(E)).
                  (C) Use of independent appraiser.--A plan 
                meets the requirements of this subparagraph if 
                all valuations of employer securities which are 
                not readily tradable on an established 
                securities market with respect to activities 
                carried on by the plan are by an independent 
                appraiser. For purposes of the preceding 
                sentence, the term ``independent appraiser'' 
                means any appraiser meeting requirements 
                similar to the requirements of the regulations 
                prescribed under section 170(a)(1).
          (29) Benefit limitations.--In the case of a defined 
        benefit plan (other than a multiemployer plan or a CSEC 
        plan) to which the requirements of section 412 apply, 
        the trust of which the plan is a part shall not 
        constitute a qualified trust under this subsection 
        unless the plan meets the requirements of section 436.
          (30) Limitations on elective deferrals.--In the case 
        of a trust which is part of a plan under which elective 
        deferrals (within the meaning of section 402(g)(3)) may 
        be made with respect to any individual during a 
        calendar year, such trust shall not constitute a 
        qualified trust under this subsection unless the plan 
        provides that the amount of such deferrals under such 
        plan and all other plans, contracts, or arrangements of 
        an employer maintaining such plan may not exceed the 
        amount of the limitation in effect under section 
        402(g)(1)(A) for taxable years beginning in such 
        calendar year.
          (31) Direct transfer of eligible rollover 
        distributions.--
                  (A) In general.--A trust shall not constitute 
                a qualified trust under this section unless the 
                plan of which such trust is a part provides 
                that if the distributee of any eligible 
                rollover distribution--
                          (i) elects to have such distribution 
                        paid directly to an eligible retirement 
                        plan, and
                          (ii) specifies the eligible 
                        retirement plan to which such 
                        distribution is to be paid (in such 
                        form and at such time as the plan 
                        administrator may prescribe),
                such distribution shall be made in the form of 
                a direct trustee-to-trustee transfer to the 
                eligible retirement plan so specified.
                  (B) Certain mandatory distributions.--
                          (i) In general.--In case of a trust 
                        which is part of an eligible plan, such 
                        trust shall not constitute a qualified 
                        trust under this section unless the 
                        plan of which such trust is a part 
                        provides that if--
                                  (I) a distribution described 
                                in clause (ii) in excess of 
                                $1,000 is made, and
                                  (II) the distributee does not 
                                make an election under 
                                subparagraph (A) and does not 
                                elect to receive the 
                                distribution directly,
                 the plan administrator shall make such 
                transfer to an individual retirement plan of a 
                designated trustee or issuer and shall notify 
                the distributee in writing (either separately 
                or as part of the notice under section 402(f)) 
                that the distribution may be transferred to 
                another individual retirement plan.
                          (ii) Eligible plan.--For purposes of 
                        clause (i), the term ``eligible plan'' 
                        means a plan which provides that any 
                        nonforfeitable accrued benefit for 
                        which the present value (as determined 
                        under section 411(a)(11)) does not 
                        exceed $5,000 shall be immediately 
                        distributed to the participant.
                  (C) Limitation.--Subparagraphs (A) and (B) 
                shall apply only to the extent that the 
                eligible rollover distribution would be 
                includible in gross income if not transferred 
                as provided in subparagraph (A) (determined 
                without regard to sections 402(c), 403(a)(4), 
                403(b)(8), and 457(e)(16)). The preceding 
                sentence shall not apply to such distribution 
                if the plan to which such distribution is 
                transferred--
                          (i) is a qualified trust which is 
                        part of a plan which is a defined 
                        contribution plan and agrees to 
                        separately account for amounts so 
                        transferred, including separately 
                        accounting for the portion of such 
                        distribution which is includible in 
                        gross income and the portion of such 
                        distribution which is not so 
                        includible, or
                          (ii) is an eligible retirement plan 
                        described in clause (i) or (ii) of 
                        section 402(c)(8)(B).
                  (D) Eligible rollover distribution.--For 
                purposes of this paragraph, the term ``eligible 
                rollover distribution'' has the meaning given 
                such term by section 402(f)(2)(A).
                  (E) Eligible retirement plan.--For purposes 
                of this paragraph, the term ``eligible 
                retirement plan'' has the meaning given such 
                term by section 402(c)(8)(B), except that a 
                qualified trust shall be considered an eligible 
                retirement plan only if it is a defined 
                contribution plan, the terms of which permit 
                the acceptance of rollover distributions.
          (32) Treatment of failure to make certain payments if 
        plan has liquidity shortfall.--
                  (A) In general.--A trust forming part of a 
                pension plan to which section 430(j)(4) or 
                433(f)(5) applies shall not be treated as 
                failing to constitute a qualified trust under 
                this section merely because such plan ceases to 
                make any payment described in subparagraph (B) 
                during any period that such plan has a 
                liquidity shortfall (as defined in section 
                430(j)(4) or 433(f)(5)).
                  (B) Payments described.--A payment is 
                described in this subparagraph if such payment 
                is--
                          (i) any payment, in excess of the 
                        monthly amount paid under a single life 
                        annuity (plus any social security 
                        supplements described in the last 
                        sentence of section 411(a)(9)), to a 
                        participant or beneficiary whose 
                        annuity starting date (as defined in 
                        section 417(f)(2)) occurs during the 
                        period referred to in subparagraph (A),
                          (ii) any payment for the purchase of 
                        an irrevocable commitment from an 
                        insurer to pay benefits, and
                          (iii) any other payment specified by 
                        the Secretary by regulations.
                  (C) Period of shortfall.--For purposes of 
                this paragraph, a plan has a liquidity 
                shortfall during the period that there is an 
                underpayment of an installment under section 
                430(j)(3) or 433(f) by reason of section 
                430(j)(4)(A) or 433(f)(5), respectively.
          (33) Prohibition on benefit increases while sponsor 
        is in bankruptcy.--
                  (A) In general.--A trust which is part of a 
                plan to which this paragraph applies shall not 
                constitute a qualified trust under this section 
                if an amendment to such plan is adopted while 
                the employer is a debtor in a case under title 
                11, United States Code, or similar Federal or 
                State law, if such amendment increases 
                liabilities of the plan by reason of--
                          (i) any increase in benefits,
                          (ii) any change in the accrual of 
                        benefits, or
                          (iii) any change in the rate at which 
                        benefits become nonforfeitable under 
                        the plan,
                with respect to employees of the debtor, and 
                such amendment is effective prior to the 
                effective date of such employer's plan of 
                reorganization.
                  (B) Exceptions.--This paragraph shall not 
                apply to any plan amendment if--
                          (i) the plan, were such amendment to 
                        take effect, would have a funding 
                        target attainment percentage (as 
                        defined in section 430(d)(2)) of 100 
                        percent or more,
                          (ii) the Secretary determines that 
                        such amendment is reasonable and 
                        provides for only de minimis increases 
                        in the liabilities of the plan with 
                        respect to employees of the debtor,
                          (iii) such amendment only repeals an 
                        amendment described in section 
                        412(d)(2), or
                          (iv) such amendment is required as a 
                        condition of qualification under this 
                        part.
                  (C) Plans to which this paragraph applies.--
                This paragraph shall apply only to plans (other 
                than multiemployer plans or CSEC plans) covered 
                under section 4021 of the Employee Retirement 
                Income Security Act of 1974.
                  (D) Employer.--For purposes of this 
                paragraph, the term ``employer'' means the 
                employer referred to in section 412(b)(1), 
                without regard to section 412(b)(2).
          (34) Benefits of missing participants on plan 
        termination.--In the case of a plan covered by title IV 
        of the Employee Retirement Income Security Act of 1974, 
        a trust forming part of such plan shall not be treated 
        as failing to constitute a qualified trust under this 
        section merely because the pension plan of which such 
        trust is a part, upon its termination, transfers 
        benefits of missing participants to the Pension Benefit 
        Guaranty Corporation in accordance with section 4050 of 
        such Act.
          (35) Diversification requirements for certain defined 
        contribution plans.--
                  (A) In general.--A trust which is part of an 
                applicable defined contribution plan shall not 
                be treated as a qualified trust unless the plan 
                meets the diversification requirements of 
                subparagraphs (B), (C), and (D).
                  (B) Employee contributions and elective 
                deferrals invested in employer securities.--In 
                the case of the portion of an applicable 
                individual's account attributable to employee 
                contributions and elective deferrals which is 
                invested in employer securities, a plan meets 
                the requirements of this subparagraph if the 
                applicable individual may elect to direct the 
                plan to divest any such securities and to 
                reinvest an equivalent amount in other 
                investment options meeting the requirements of 
                subparagraph (D).
                  (C) Employer contributions invested in 
                employer securities.--In the case of the 
                portion of the account attributable to employer 
                contributions other than elective deferrals 
                which is invested in employer securities, a 
                plan meets the requirements of this 
                subparagraph if each applicable individual 
                who--
                          (i) is a participant who has 
                        completed at least 3 years of service, 
                        or
                          (ii) is a beneficiary of a 
                        participant described in clause (i) or 
                        of a deceased participant,
                may elect to direct the plan to divest any such 
                securities and to reinvest an equivalent amount 
                in other investment options meeting the 
                requirements of subparagraph (D).
                  (D) Investment options.--
                          (i) In general.--The requirements of 
                        this subparagraph are met if the plan 
                        offers not less than 3 investment 
                        options, other than employer 
                        securities, to which an applicable 
                        individual may direct the proceeds from 
                        the divestment of employer securities 
                        pursuant to this paragraph, each of 
                        which is diversified and has materially 
                        different risk and return 
                        characteristics.
                          (ii) Treatment of certain 
                        restrictions and conditions.--
                                  (I) Time for making 
                                investment choices.--A plan 
                                shall not be treated as failing 
                                to meet the requirements of 
                                this subparagraph merely 
                                because the plan limits the 
                                time for divestment and 
                                reinvestment to periodic, 
                                reasonable opportunities 
                                occurring no less frequently 
                                than quarterly.
                                  (II) Certain restrictions and 
                                conditions not allowed.--Except 
                                as provided in regulations, a 
                                plan shall not meet the 
                                requirements of this 
                                subparagraph if the plan 
                                imposes restrictions or 
                                conditions with respect to the 
                                investment of employer 
                                securities which are not 
                                imposed on the investment of 
                                other assets of the plan. This 
                                subclause shall not apply to 
                                any restrictions or conditions 
                                imposed by reason of the 
                                application of securities laws.
                  (E) Applicable defined contribution plan.--
                For purposes of this paragraph--
                          (i) In general.--The term 
                        ``applicable defined contribution 
                        plan'' means any defined contribution 
                        plan which holds any publicly traded 
                        employer securities.
                          (ii) Exception for certain esops.--
                        Such term does not include an employee 
                        stock ownership plan if--
                                  (I) there are no 
                                contributions to such plan (or 
                                earnings thereunder) which are 
                                held within such plan and are 
                                subject to subsection (k) or 
                                (m), and
                                  (II) such plan is a separate 
                                plan for purposes of section 
                                414(l) with respect to any 
                                other defined benefit plan or 
                                defined contribution plan 
                                maintained by the same employer 
                                or employers.
                          (iii) Exception for one participant 
                        plans.--Such term does not include a 
                        one-participant retirement plan.
                          (iv) One-participant retirement 
                        plan.--For purposes of clause (iii), 
                        the term ``one-participant retirement 
                        plan'' means a retirement plan that on 
                        the first day of the plan year--
                                  (I) covered only one 
                                individual (or the individual 
                                and the individual's spouse) 
                                and the individual (or the 
                                individual and the individual's 
                                spouse) owned 100 percent of 
                                the plan sponsor (whether or 
                                not incorporated), or
                                  (II) covered only one or more 
                                partners (or partners and their 
                                spouses) in the plan sponsor.
                  (F) Certain plans treated as holding publicly 
                traded employer securities.--
                          (i) In general.--Except as provided 
                        in regulations or in clause (ii), a 
                        plan holding employer securities which 
                        are not publicly traded employer 
                        securities shall be treated as holding 
                        publicly traded employer securities if 
                        any employer corporation, or any member 
                        of a controlled group of corporations 
                        which includes such employer 
                        corporation, has issued a class of 
                        stock which is a publicly traded 
                        employer security.
                          (ii) Exception for certain controlled 
                        groups with publicly traded 
                        securities.--Clause (i) shall not apply 
                        to a plan if--
                                  (I) no employer corporation, 
                                or parent corporation of an 
                                employer corporation, has 
                                issued any publicly traded 
                                employer security, and
                                  (II) no employer corporation, 
                                or parent corporation of an 
                                employer corporation, has 
                                issued any special class of 
                                stock which grants particular 
                                rights to, or bears particular 
                                risks for, the holder or issuer 
                                with respect to any corporation 
                                described in clause (i) which 
                                has issued any publicly traded 
                                employer security.
                          (iii) Definitions.--For purposes of 
                        this subparagraph, the term--
                                  (I) ``controlled group of 
                                corporations'' has the meaning 
                                given such term by section 
                                1563(a), except that ``50 
                                percent'' shall be substituted 
                                for ``80 percent'' each place 
                                it appears,
                                  (II) ``employer corporation'' 
                                means a corporation which is an 
                                employer maintaining the plan, 
                                and
                                  (III) ``parent corporation'' 
                                has the meaning given such term 
                                by section 424(e).
                  (G) Other definitions.--For purposes of this 
                paragraph--
                          (i) Applicable individual.--The term 
                        ``applicable individual'' means--
                                  (I) any participant in the 
                                plan, and
                                  (II) any beneficiary who has 
                                an account under the plan with 
                                respect to which the 
                                beneficiary is entitled to 
                                exercise the rights of a 
                                participant.
                          (ii) Elective deferral.--The term 
                        ``elective deferral'' means an employer 
                        contribution described in section 
                        402(g)(3)(A).
                          (iii) Employer security.--The term 
                        ``employer security'' has the meaning 
                        given such term by section 407(d)(1) of 
                        the Employee Retirement Income Security 
                        Act of 1974.
                          (iv) Employee stock ownership plan.--
                        The term ``employee stock ownership 
                        plan'' has the meaning given such term 
                        by section 4975(e)(7).
                          (v) Publicly traded employer 
                        securities.--The term ``publicly traded 
                        employer securities'' means employer 
                        securities which are readily tradable 
                        on an established securities market.
                          (vi) Year of service.--The term 
                        ``year of service'' has the meaning 
                        given such term by section 411(a)(5).
                  (H) Transition rule for securities 
                attributable to employer contributions.--
                          (i) Rules phased in over 3 years.--
                                  (I) In general.--In the case 
                                of the portion of an account to 
                                which subparagraph (C) applies 
                                and which consists of employer 
                                securities acquired in a plan 
                                year beginning before January 
                                1, 2007, subparagraph (C) shall 
                                only apply to the applicable 
                                percentage of such securities. 
                                This subparagraph shall be 
                                applied separately with respect 
                                to each class of securities.
                                  (II) Exception for certain 
                                participants aged 55 or over.--
                                Subclause (I) shall not apply 
                                to an applicable individual who 
                                is a participant who has 
                                attained age 55 and completed 
                                at least 3 years of service 
                                before the first plan year 
                                beginning after December 31, 
                                2005.
                          (ii) Applicable percentage.--For 
                        purposes of clause (i), the applicable 
                        percentage shall be determined as 
                        follows:
          (36) Distributions during working retirement.--A 
        trust forming part of a pension plan shall not be 
        treated as failing to constitute a qualified trust 
        under this section solely because the plan provides 
        that a distribution may be made from such trust to an 
        employee who has attained age 62 and who is not 
        separated from employment at the time of such 
        distribution.
          (37) Death benefits under userra-qualified active 
        military service.--A trust shall not constitute a 
        qualified trust unless the plan provides that, in the 
        case of a participant who dies while performing 
        qualified military service (as defined in section 
        414(u)), the survivors of the participant are entitled 
        to any additional benefits (other than benefit accruals 
        relating to the period of qualified military service) 
        provided under the plan had the participant resumed and 
        then terminated employment on account of death.
Paragraphs (11), (12), (13), (14), (15), (19), and (20) shall 
apply only in the case of a plan to which section 411 (relating 
to minimum vesting standards) applies without regard to 
subsection (e)(2) of such section.
  (b) Certain retroactive changes in plan.--A stock bonus, 
pension, profit-sharing, or annuity plan shall be considered as 
satisfying the requirements of subsection (a) for the period 
beginning with the date on which it was put into effect, or for 
the period beginning with the earlier of the date on which 
there was adopted or put into effect any amendment which caused 
the plan to fail to satisfy such requirements, and ending with 
the time prescribed by law for filing the return of the 
employer for his taxable year in which such plan or amendment 
was adopted (including extensions thereof) or such later time 
as the Secretary may designate, if all provisions of the plan 
which are necessary to satisfy such requirements are in effect 
by the end of such period and have been made effective for all 
purposes for the whole of such period.
  (c) Definitions and rules relating to self-employed 
individuals and owner-employees.--For purposes of this 
section--
          (1) Self-employed individual treated as employee.--
                  (A) In general.--The term ``employee'' 
                includes, for any taxable year, an individual 
                who is a self-employed individual for such 
                taxable year.
                  (B) Self-employed individual.--The term 
                ``self-employed individual'' means, with 
                respect to any taxable year, an individual who 
                has earned income (as defined in paragraph (2)) 
                for such taxable year. To the extent provided 
                in regulations prescribed by the Secretary, 
                such term also includes, for any taxable year--
                          (i) an individual who would be a 
                        self-employed individual within the 
                        meaning of the preceding sentence but 
                        for the fact that the trade or business 
                        carried on by such individual did not 
                        have net profits for the taxable year, 
                        and
                          (ii) an individual who has been a 
                        self-employed individual within the 
                        meaning of the preceding sentence for 
                        any prior taxable year.
          (2) Earned income.--
                  (A) In general.--The term ``earned income'' 
                means the net earnings from self-employment (as 
                defined in section 1402(a)), but such net 
                earnings shall be determined--
                          (i) only with respect to a trade or 
                        business in which personal services of 
                        the taxpayer are a material income-
                        producing factor,
                          (ii) without regard to paragraphs (4) 
                        and (5) of section 1402(c),
                          (iii) in the case of any individual 
                        who is treated as an employee under 
                        subparagraph (A), (C), or (D) of 
                        section 3121(d)(3), without regard to 
                        section 1402(c)(2),
                          (iv) without regard to items which 
                        are not included in gross income for 
                        purposes of this chapter, and the 
                        deductions properly allocable to or 
                        chargeable against such items,
                          (v) with regard to the deductions 
                        allowed by section 404 to the taxpayer, 
                        and
                          (vi) with regard to the deduction 
                        allowed to the taxpayer by section 
                        164(f).
                For purposes of this subparagraph, section 
                1402, as in effect for a taxable year ending on 
                December 31, 1962, shall be treated as having 
                been in effect for all taxable years ending 
                before such date. For purposes of this part 
                only (other than sections 419 and 419A), this 
                subparagraph shall be applied as if the term 
                ``trade or business'' for purposes of section 
                1402 included service described in section 
                1402(c)(6).
                  (C) Income from disposition of certain 
                property.--For purposes of this section, the 
                term ``earned income'' includes gains (other 
                than any gain which is treated under any 
                provision of this chapter as gain from the sale 
                or exchange of a capital asset) and net 
                earnings derived from the sale or other 
                disposition of, the transfer of any interest 
                in, or the licensing of the use of property 
                (other than good will) by an individual whose 
                personal efforts created such property.
          (3) Owner-employee.--The term ``owner-employee'' 
        means an employee who--
                  (A) owns the entire interest in an 
                unincorporated trade or business, or
                  (B) in the case of a partnership, is a 
                partner who owns more than 10 percent of either 
                the capital interest or the profits interest in 
                such partnership.
        To the extent provided in regulations prescribed by the 
        Secretary, such term also means an individual who has 
        been an owner-employee within the meaning of the 
        preceding sentence.
          (4) Employer.--An individual who owns the entire 
        interest in an unincorporated trade or business shall 
        be treated as his own employer. A partnership shall be 
        treated as the employer of each partner who is an 
        employee within the meaning of paragraph (1).
          (5) Contributions on behalf of owner-employees.--The 
        term ``contribution on behalf of an owner-employee'' 
        includes, except as the context otherwise requires, a 
        contribution under a plan--
                  (A) by the employer for an owner-employee, 
                and
                  (B) by an owner-employee as an employee.
          (6) Special rule for certain fishermen.--For purposes 
        of this subsection, the term ``self-employed 
        individual'' includes an individual described in 
        section 3121(b)(20) (relating to certain fishermen).
  (d) Contribution limit on owner-employees.--A trust forming 
part of a pension or profit-sharing plan which provides 
contributions or benefits for employees some or all of whom are 
owner-employees shall constitute a qualified trust under this 
section only if, in addition to meeting the requirements of 
subsection (a), the plan provides that contributions on behalf 
of any owner-employee may be made only with respect to the 
earned income of such owner-employee which is derived from the 
trade or business with respect to which such plan is 
established.
  (f) Certain custodial accounts and contracts.--For purposes 
of this title, a custodial account, an annuity contract, or a 
contract (other than a life, health or accident, property, 
casualty, or liability insurance contract) issued by an 
insurance company qualified to do business in a State shall be 
treated as a qualified trust under this section if--
          (1) the custodial account or contract would, except 
        for the fact that it is not a trust, constitute a 
        qualified trust under this section, and
          (2) in the case of a custodial account the assets 
        thereof are held by a bank (as defined in section 
        408(n)) or another person who demonstrates, to the 
        satisfaction of the Secretary, that the manner in which 
        he will hold the assets will be consistent with the 
        requirements of this section.
For purposes of this title, in the case of a custodial account 
or contract treated as a qualified trust under this section by 
reason of this subsection, the person holding the assets of 
such account or holding such contract shall be treated as the 
trustee thereof.
  (g) Annuity defined.--For purposes of this section and 
sections 402, 403, and 404, the term ``annuity'' includes a 
face-amount certificate, as defined in section 2(a)(15) of the 
Investment Company Act of 1940 (15 U.S.C., sec. 80a-2); but 
does not include any contract or certificate issued after 
December 31, 1962, which is transferable, if any person other 
than the trustee of a trust described in section 401(a) which 
is exempt from tax under section 501(a) is the owner of such 
contract or certificate.
  (h) Medical, etc., benefits for retired employees and their 
spouses and dependents.--Under regulations prescribed by the 
Secretary, and subject to the provisions of section 420, a 
pension or annuity plan may provide for the payment of benefits 
for sickness, accident, hospitalization, and medical expenses 
of retired employees, their spouses and their dependents, but 
only if--
          (1) such benefits are subordinate to the retirement 
        benefits provided by the plan,
          (2) a separate account is established and maintained 
        for such benefits,
          (3) the employer's contributions to such separate 
        account are reasonable and ascertainable,
          (4) it is impossible, at any time prior to the 
        satisfaction of all liabilities under the plan to 
        provide such benefits, for any part of the corpus or 
        income of such separate account to be (within the 
        taxable year or thereafter) used for, or diverted to, 
        any purpose other than the providing of such benefits,
          (5) notwithstanding the provisions of subsection 
        (a)(2), upon the satisfaction of all liabilities under 
        the plan to provide such benefits, any amount remaining 
        in such separate account must, under the terms of the 
        plan, be returned to the employer, and
          (6) in the case of an employee who is a key employee, 
        a separate account is established and maintained for 
        such benefits payable to such employee (and [his 
        spouse] the employee's spouse and dependents) and such 
        benefits (to the extent attributable to plan years 
        beginning after March 31, 1984, for which the employee 
        is a key employee) are only payable to such employee 
        (and [his spouse] the employee's spouse and dependents) 
        from such separate account.
For purposes of paragraph (6), the term ``key employee'' means 
any employee, who at any time during the plan year or any 
preceding plan year during which contributions were made on 
behalf of such employee, is or was a key employee as defined in 
section 416(i). In no event shall the requirements of paragraph 
(1) be treated as met if the aggregate actual contributions for 
medical benefits, when added to actual contributions for life 
insurance protection under the plan, exceed 25 percent of the 
total actual contributions to the plan (other than 
contributions to fund past service credits) after the date on 
which the account is established. For purposes of this 
subsection, the term ``dependent'' shall include any individual 
who is a child (as defined in section 152(f)(1)) of a retired 
employee who as of the end of the calendar year has not 
attained age 27.
  (i) Certain union-negotiated pension plans.--In the case of a 
trust forming part of a pension plan which has been determined 
by the Secretary to constitute a qualified trust under 
subsection (a) and to be exempt from taxation under section 
501(a) for a period beginning after contributions were first 
made to or for such trust, if it is shown to the satisfaction 
of the Secretary that--
          (1) such trust was created pursuant to a collective 
        bargaining agreement between employee representatives 
        and one or more employers,
          (2) any disbursements of contributions, made to or 
        for such trust before the time as of which the 
        Secretary determined that the trust constituted a 
        qualified trust, substantially complied with the terms 
        of the trust, and the plan of which the trust is a 
        part, as subsequently qualified, and
          (3) before the time as of which the Secretary 
        determined that the trust constitutes a qualified 
        trust, the contributions to or for such trust were not 
        used in a manner which would jeopardize the interests 
        of its beneficiaries,
then such trust shall be considered as having constituted a 
qualified trust under subsection (a) and as having been exempt 
from taxation under section 501(a) for the period beginning on 
the date on which contributions were first made to or for such 
trust and ending on the date such trust first constituted 
(without regard to this subsection) a qualified trust under 
subsection (a).
  (k) Cash or deferred arrangements.--
          (1) General rule.--A profit-sharing or stock bonus 
        plan, a pre-ERISA money purchase plan, or a rural 
        cooperative plan shall not be considered as not 
        satisfying the requirements of subsection (a) merely 
        because the plan includes a qualified cash or deferred 
        arrangement.
          (2) Qualified cash or deferred arrangement.--A 
        qualified cash or deferred arrangement is any 
        arrangement which is part of a profit-sharing or stock 
        bonus plan, a pre-ERISA money purchase plan, or a rural 
        cooperative plan which meets the requirements of 
        subsection (a)--
                  (A) under which a covered employee may elect 
                to have the employer make payments as 
                contributions to a trust under the plan on 
                behalf of the employee, or to the employee 
                directly in cash;
                  (B) under which amounts held by the trust 
                which are attributable to employer 
                contributions made pursuant to the employee's 
                election--
                          (i) may not be distributable to 
                        participants or other beneficiaries 
                        earlier than--
                                  (I) severance from 
                                employment, death, or 
                                disability,
                                  (II) an event described in 
                                paragraph (10),
                                  (III) in the case of a 
                                profit-sharing or stock bonus 
                                plan, the attainment of age 
                                591/2,
                                  (IV) subject to the 
                                provisions of paragraph (14), 
                                upon hardship of the employee, 
                                or
                                  (V) in the case of a 
                                qualified reservist 
                                distribution (as defined in 
                                section 72(t)(2)(G)(iii)), the 
                                date on which a period referred 
                                to in subclause (III) of such 
                                section begins, and
                          (ii) will not be distributable merely 
                        by reason of the completion of a stated 
                        period of participation or the lapse of 
                        a fixed number of years;
                  (C) which provides that an employee's right 
                to his accrued benefit derived from employer 
                contributions made to the trust pursuant to his 
                election is nonforfeitable, and
                  (D) which does not require, as a condition of 
                participation in the arrangement, that an 
                employee complete a period of service with the 
                employer (or employers) maintaining the plan 
                extending beyond the period permitted under 
                section 410(a)(1) (determined without regard to 
                subparagraph (B)(i) thereof).
          (3) Application of participation and discrimination 
        standards.--
                  (A) A cash or deferred arrangement shall not 
                be treated as a qualified cash or deferred 
                arrangement unless--
                          (i) those employees eligible to 
                        benefit under the arrangement satisfy 
                        the provisions of section 410(b)(1), 
                        and
                          (ii) the actual deferral percentage 
                        for eligible highly compensated 
                        employees (as defined in paragraph (5)) 
                        for the plan year bears a relationship 
                        to the actual deferral percentage for 
                        all other eligible employees for the 
                        preceding plan year which meets either 
                        of the following tests:
                                  (I) The actual deferral 
                                percentage for the group of 
                                eligible highly compensated 
                                employees is not more than the 
                                actual deferral percentage of 
                                all other eligible employees 
                                multiplied by 1.25.
                                  (II) The excess of the actual 
                                deferral percentage for the 
                                group of eligible highly 
                                compensated employees over that 
                                of all other eligible employees 
                                is not more than 2 percentage 
                                points, and the actual deferral 
                                percentage for the group of 
                                eligible highly compensated 
                                employees is not more than the 
                                actual deferral percentage of 
                                all other eligible employees 
                                multiplied by 2.
                 If 2 or more plans which include cash or 
                deferred arrangements are considered as 1 plan 
                for purposes of section 401(a)(4) or 410(b), 
                the cash or deferred arrangements included in 
                such plans shall be treated as 1 arrangement 
                for purposes of this subparagraph.
                If any highly compensated employee is a 
                participant under 2 or more cash or deferred 
                arrangements of the employer, for purposes of 
                determining the deferral percentage with 
                respect to such employee, all such cash or 
                deferred arrangements shall be treated as 1 
                cash or deferred arrangement. An arrangement 
                may apply clause (ii) by using the plan year 
                rather than the preceding plan year if the 
                employer so elects, except that if such an 
                election is made, it may not be changed except 
                as provided by the Secretary.
                  (B) For purposes of subparagraph (A), the 
                actual deferral percentage for a specified 
                group of employees for a plan year shall be the 
                average of the ratios (calculated separately 
                for each employee in such group) of--
                          (i) the amount of employer 
                        contributions actually paid over to the 
                        trust on behalf of each such employee 
                        for such plan year, to
                          (ii) the employee's compensation for 
                        such plan year.
                  (C) A cash or deferred arrangement shall be 
                treated as meeting the requirements of 
                subsection (a)(4) with respect to contributions 
                if the requirements of subparagraph (A)(ii) are 
                met.
                  (D) For purposes of subparagraph (B), the 
                employer contributions on behalf of any 
                employee--
                          (i) shall include any employer 
                        contributions made pursuant to the 
                        employee's election under paragraph 
                        (2), and
                          (ii) under such rules as the 
                        Secretary may prescribe, may, at the 
                        election of the employer, include--
                                  (I) matching contributions 
                                (as defined in 401(m)(4)(A)) 
                                which meet the requirements of 
                                paragraph (2)(B) and (C), and
                                  (II) qualified nonelective 
                                contributions (within the 
                                meaning of section 
                                401(m)(4)(C)).
                  (E) For purposes of this paragraph, in the 
                case of the first plan year of any plan (other 
                than a successor plan), the amount taken into 
                account as the actual deferral percentage of 
                nonhighly compensated employees for the 
                preceding plan year shall be--
                          (i) 3 percent, or
                          (ii) if the employer makes an 
                        election under this subclause, the 
                        actual deferral percentage of nonhighly 
                        compensated employees determined for 
                        such first plan year.
                  (F) Special rule for early participation.--If 
                an employer elects to apply section 
                410(b)(4)(B) in determining whether a cash or 
                deferred arrangement meets the requirements of 
                subparagraph (A)(i), the employer may, in 
                determining whether the arrangement meets the 
                requirements of subparagraph (A)(ii), exclude 
                from consideration all eligible employees 
                (other than highly compensated employees) who 
                have not met the minimum age and service 
                requirements of section 410(a)(1)(A).
                  (G) Governmental plan.--A governmental plan 
                (within the meaning of section 414(d)) shall be 
                treated as meeting the requirements of this 
                paragraph.
          (4) Other requirements.--
                  (A) Benefits (other than matching 
                contributions) must not be contingent on 
                election to defer.--A cash or deferred 
                arrangement of any employer shall not be 
                treated as a qualified cash or deferred 
                arrangement if any other benefit is conditioned 
                (directly or indirectly) on the employee 
                electing to have the employer make or not make 
                contributions under the arrangement in lieu of 
                receiving cash. The preceding sentence shall 
                not apply to any matching contribution (as 
                defined in section 401(m)) made by reason of 
                such an election.
                  (B) Eligibility of State and local 
                governments and tax-exempt organizations.--
                          (i) Tax-exempts eligible.--Except as 
                        provided in clause (ii), any 
                        organization exempt from tax under this 
                        subtitle may include a qualified cash 
                        or deferred arrangement as part of a 
                        plan maintained by it.
                          (ii) Governments ineligible.--A cash 
                        or deferred arrangement shall not be 
                        treated as a qualified cash or deferred 
                        arrangement if it is part of a plan 
                        maintained by a State or local 
                        government or political subdivision 
                        thereof, or any agency or 
                        instrumentality thereof. This clause 
                        shall not apply to a rural cooperative 
                        plan or to a plan of an employer 
                        described in clause (iii).
                          (iii) Treatment of Indian tribal 
                        governments.--An employer which is an 
                        Indian tribal government (as defined in 
                        section 7701(a)(40)), a subdivision of 
                        an Indian tribal government (determined 
                        in accordance with section 7871(d)), an 
                        agency or instrumentality of an Indian 
                        tribal government or subdivision 
                        thereof, or a corporation chartered 
                        under Federal, State, or tribal law 
                        which is owned in whole or in part by 
                        any of the foregoing may include a 
                        qualified cash or deferred arrangement 
                        as part of a plan maintained by the 
                        employer.
                  (C) Coordination with other plans.--Except as 
                provided in section 401(m), any employer 
                contribution made pursuant to an employee's 
                election under a qualified cash or deferred 
                arrangement shall not be taken into account for 
                purposes of determining whether any other plan 
                meets the requirements of section 401(a) or 
                410(b). This subparagraph shall not apply for 
                purposes of determining whether a plan meets 
                the average benefit requirement of section 
                410(b)(2)(A)(ii).
          (5) Highly compensated employee.--For purposes of 
        this subsection, the term ``highly compensated 
        employee'' has the meaning given such term by section 
        414(q).
          (6) Pre-ERISA money purchase plan.--For purposes of 
        this subsection, the term ``pre-ERISA money purchase 
        plan'' means a pension plan--
                  (A) which is a defined contribution plan (as 
                defined in section 414(i)),
                  (B) which was in existence on June 27, 1974, 
                and which, on such date, included a salary 
                reduction arrangement, and
                  (C) under which neither the employee 
                contributions nor the employer contributions 
                may exceed the levels provided for by the 
                contribution formula in effect under the plan 
                on such date.
          (7) Rural cooperative plan.--For purposes of this 
        subsection--
                  (A) In general.--The term ``rural cooperative 
                plan'' means any pension plan--
                          (i) which is a defined contribution 
                        plan (as defined in section 414(i)), 
                        and
                          (ii) which is established and 
                        maintained by a rural cooperative.
                  (B) Rural cooperative defined.--For purposes 
                of subparagraph (A), the term ``rural 
                cooperative'' means--
                          (i) any organization which--
                                  (I) is engaged primarily in 
                                providing electric service on a 
                                mutual or cooperative basis, or
                                  (II) is engaged primarily in 
                                providing electric service to 
                                the public in its area of 
                                service and which is exempt 
                                from tax under this subtitle or 
                                which is a State or local 
                                government (or an agency or 
                                instrumentality thereof), other 
                                than a municipality (or an 
                                agency or instrumentality 
                                thereof),
                          (ii) any organization described in 
                        paragraph (4) or (6) of section 501(c) 
                        and at least 80 percent of the members 
                        of which are organizations described in 
                        clause (i),
                          (iii) a cooperative telephone company 
                        described in section 501(c)(12),
                          (iv) any organization which--
                                  (I) is a mutual irrigation or 
                                ditch company described in 
                                section 501(c)(12) (without 
                                regard to the 85 percent 
                                requirement thereof), or
                                  (II) is a district organized 
                                under the laws of a State as a 
                                municipal corporation for the 
                                purpose of irrigation, water 
                                conservation, or drainage, and
                          (v) an organization which is a 
                        national association of organizations 
                        described in clause (i), (ii),, (iii), 
                        or (iv).
                  (C) Special rule for certain distributions.--
                A rural cooperative plan which includes a 
                qualified cash or deferred arrangement shall 
                not be treated as violating the requirements of 
                section 401(a) or of paragraph (2) merely by 
                reason of a hardship distribution or a 
                distribution to a participant after attainment 
                of age 591/2. For purposes of this section, the 
                term ``hardship distribution'' means a 
                distribution described in paragraph 
                (2)(B)(i)(IV) (without regard to the limitation 
                of its application to profit-sharing or stock 
                bonus plans).
          (8) Arrangement not disqualified if excess 
        contributions distributed.--
                  (A) In general.--A cash or deferred 
                arrangement shall not be treated as failing to 
                meet the requirements of clause (ii) of 
                paragraph (3)(A) for any plan year if, before 
                the close of the following plan year--
                          (i) the amount of the excess 
                        contributions for such plan year (and 
                        any income allocable to such 
                        contributions through the end of such 
                        year) is distributed, or
                          (ii) to the extent provided in 
                        regulations, the employee elects to 
                        treat the amount of the excess 
                        contributions as an amount distributed 
                        to the employee and then contributed by 
                        the employee to the plan.
                Any distribution of excess contributions (and 
                income) may be made without regard to any other 
                provision of law.
                  (B) Excess contributions.--For purposes of 
                subparagraph (A), the term ``excess 
                contributions'' means, with respect to any plan 
                year, the excess of--
                          (i) the aggregate amount of employer 
                        contributions actually paid over to the 
                        trust on behalf of highly compensated 
                        employees for such plan year, over
                          (ii) the maximum amount of such 
                        contributions permitted under the 
                        limitations of clause (ii) of paragraph 
                        (3)(A) (determined by reducing 
                        contributions made on behalf of highly 
                        compensated employees in order of the 
                        actual deferral percentages beginning 
                        with the highest of such percentages).
                  (C) Method of distributing excess 
                contributions.--Any distribution of the excess 
                contributions for any plan year shall be made 
                to highly compensated employees on the basis of 
                the amount of contributions by, or on behalf 
                of, each of such employees.
                  (D) Additional tax under section 72(t) not to 
                apply.--No tax shall be imposed under section 
                72(t) on any amount required to be distributed 
                under this paragraph.
                  (E) Treatment of matching contributions 
                forfeited by reason of excess deferral or 
                contribution or permissible withdrawal.--For 
                purposes of paragraph (2)(C), a matching 
                contribution (within the meaning of subsection 
                (m)) shall not be treated as forfeitable merely 
                because such contribution is forfeitable if the 
                contribution to which the matching contribution 
                relates is treated as an excess contribution 
                under subparagraph (B), an excess deferral 
                under section 402(g)(2)(A), a permissible 
                withdrawal under section 414(w), or an excess 
                aggregate contribution under section 
                401(m)(6)(B).
                  (F) Cross reference.--For excise tax on 
                certain excess contributions, see section 4979.
          (9) Compensation.--For purposes of this subsection, 
        the term ``compensation'' has the meaning given such 
        term by section 414(s).
          (10) Distributions upon termination of plan.--
                  (A) In general.--An event described in this 
                subparagraph is the termination of the plan 
                without establishment or maintenance of another 
                defined contribution plan (other than an 
                employee stock ownership plan as defined in 
                section 4975(e)(7)).
                  (B) Distributions must be lump sum 
                distributions.--
                          (i) In general.--A termination shall 
                        not be treated as described in 
                        subparagraph (A) with respect to any 
                        employee unless the employee receives a 
                        lump sum distribution by reason of the 
                        termination.
                          (ii) Lump-sum distribution.--For 
                        purposes of this subparagraph, the term 
                        ``lump-sum distribution'' has the 
                        meaning given such term by section 
                        402(e)(4)(D) (without regard to 
                        subclauses (I), (II), (III), and (IV) 
                        of clause (i) thereof). Such term 
                        includes a distribution of an annuity 
                        contract from--
                                  (I) a trust which forms a 
                                part of a plan described in 
                                section 401(a) and which is 
                                exempt from tax under section 
                                501(a), or
                                  (II) an annuity plan 
                                described in section 403(a).
          (11) Adoption of simple plan to meet 
        nondiscrimination tests.--
                  (A) In general.--A cash or deferred 
                arrangement maintained by an eligible employer 
                shall be treated as meeting the requirements of 
                paragraph (3)(A)(ii) if such arrangement 
                meets--
                          (i) the contribution requirements of 
                        subparagraph (B),
                          (ii) the exclusive plan requirements 
                        of subparagraph (C), and
                          (iii) the vesting requirements of 
                        section 408(p)(3).
                  (B) Contribution requirements.--
                          (i) In general.--The requirements of 
                        this subparagraph are met if, under the 
                        arrangement--
                                  (I) an employee may elect to 
                                have the employer make elective 
                                contributions for the year on 
                                behalf of the employee to a 
                                trust under the plan in an 
                                amount which is expressed as a 
                                percentage of compensation of 
                                the employee but which in no 
                                event exceeds the amount in 
                                effect under section 
                                408(p)(2)(A)(ii),
                                  (II) the employer is required 
                                to make a matching contribution 
                                to the trust for the year in an 
                                amount equal to so much of the 
                                amount the employee elects 
                                under subclause (I) as does not 
                                exceed 3 percent of 
                                compensation for the year, and
                                  (III) no other contributions 
                                may be made other than 
                                contributions described in 
                                subclause (I) or (II).
                          (ii) Employer may elect 2-percent 
                        nonelective contribution.--An employer 
                        shall be treated as meeting the 
                        requirements of clause (i)(II) for any 
                        year if, in lieu of the contributions 
                        described in such clause, the employer 
                        elects (pursuant to the terms of the 
                        arrangement) to make nonelective 
                        contributions of 2 percent of 
                        compensation for each employee who is 
                        eligible to participate in the 
                        arrangement and who has at least $5,000 
                        of compensation from the employer for 
                        the year. If an employer makes an 
                        election under this subparagraph for 
                        any year, the employer shall notify 
                        employees of such election within a 
                        reasonable period of time before the 
                        60th day before the beginning of such 
                        year.
                          (iii) Administrative requirements.--
                                  (I) In general.--Rules 
                                similar to the rules of 
                                subparagraphs (B) and (C) of 
                                section 408(p)(5) shall apply 
                                for purposes of this 
                                subparagraph.
                                  (II) Notice of election 
                                period.--The requirements of 
                                this subparagraph shall not be 
                                treated as met with respect to 
                                any year unless the employer 
                                notifies each employee eligible 
                                to participate, within a 
                                reasonable period of time 
                                before the 60th day before the 
                                beginning of such year (and, 
                                for the first year the employee 
                                is so eligible, the 60th day 
                                before the first day such 
                                employee is so eligible), of 
                                the rules similar to the rules 
                                of section 408(p)(5)(C) which 
                                apply by reason of subclause 
                                (I).
                  (C) Exclusive plan requirement.--The 
                requirements of this subparagraph are met for 
                any year to which this paragraph applies if no 
                contributions were made, or benefits were 
                accrued, for services during such year under 
                any qualified plan of the employer on behalf of 
                any employee eligible to participate in the 
                cash or deferred arrangement, other than 
                contributions described in subparagraph (B).
                  (D) Definitions and special rule.--
                          (i) Definitions.--For purposes of 
                        this paragraph, any term used in this 
                        paragraph which is also used in section 
                        408(p) shall have the meaning given 
                        such term by such section.
                          (ii) Coordination with top-heavy 
                        rules.--A plan meeting the requirements 
                        of this paragraph for any year shall 
                        not be treated as a top-heavy plan 
                        under section 416 for such year if such 
                        plan allows only contributions required 
                        under this paragraph.
          (12) Alternative methods of meeting nondiscrimination 
        requirements.--
                  (A) In general.--A cash or deferred 
                arrangement shall be treated as meeting the 
                requirements of paragraph (3)(A)(ii) if such 
                arrangement--
                          (i) meets the contribution 
                        requirements of subparagraph (B) or 
                        (C), and
                          (ii) meets the notice requirements of 
                        subparagraph (D).
                  (B) Matching contributions.--
                          (i) In general.--The requirements of 
                        this subparagraph are met if, under the 
                        arrangement, the employer makes 
                        matching contributions on behalf of 
                        each employee who is not a highly 
                        compensated employee in an amount equal 
                        to--
                                  (I) 100 percent of the 
                                elective contributions of the 
                                employee to the extent such 
                                elective contributions do not 
                                exceed 3 percent of the 
                                employee's compensation, and
                                  (II) 50 percent of the 
                                elective contributions of the 
                                employee to the extent that 
                                such elective contributions 
                                exceed 3 percent but do not 
                                exceed 5 percent of the 
                                employee's compensation.
                          (ii) Rate for highly compensated 
                        employees.--The requirements of this 
                        subparagraph are not met if, under the 
                        arrangement, the rate of matching 
                        contribution with respect to any 
                        elective contribution of a highly 
                        compensated employee at any rate of 
                        elective contribution is greater than 
                        that with respect to an employee who is 
                        not a highly compensated employee.
                          (iii) Alternative plan designs.--If 
                        the rate of any matching contribution 
                        with respect to any rate of elective 
                        contribution is not equal to the 
                        percentage required under clause (i), 
                        an arrangement shall not be treated as 
                        failing to meet the requirements of 
                        clause (i) if--
                                  (I) the rate of an employer's 
                                matching contribution does not 
                                increase as an employee's rate 
                                of elective contributions 
                                increase, and
                                  (II) the aggregate amount of 
                                matching contributions at such 
                                rate of elective contribution 
                                is at least equal to the 
                                aggregate amount of matching 
                                contributions which would be 
                                made if matching contributions 
                                were made on the basis of the 
                                percentages described in clause 
                                (i).
                  (C) Nonelective contributions.--The 
                requirements of this subparagraph are met if, 
                under the arrangement, the employer is 
                required, without regard to whether the 
                employee makes an elective contribution or 
                employee contribution, to make a contribution 
                to a defined contribution plan on behalf of 
                each employee who is not a highly compensated 
                employee and who is eligible to participate in 
                the arrangement in an amount equal to at least 
                3 percent of the employee's compensation.
                  (D) Notice requirement.--An arrangement meets 
                the requirements of this paragraph if, under 
                the arrangement, each employee eligible to 
                participate is, within a reasonable period 
                before any year, given written notice of the 
                employee's rights and obligations under the 
                arrangement which--
                          (i) is sufficiently accurate and 
                        comprehensive to apprise the employee 
                        of such rights and obligations, and
                          (ii) is written in a manner 
                        calculated to be understood by the 
                        average employee eligible to 
                        participate.
                  (E) Other requirements.--
                          (i) Withdrawal and vesting 
                        restrictions.--An arrangement shall not 
                        be treated as meeting the requirements 
                        of subparagraph (B) or (C) of this 
                        paragraph unless the requirements of 
                        subparagraphs (B) and (C) of paragraph 
                        (2) are met with respect to all 
                        employer contributions (including 
                        matching contributions) taken into 
                        account in determining whether the 
                        requirements of subparagraphs (B) and 
                        (C) of this paragraph are met.
                          (ii) Social security and similar 
                        contributions not taken into account.--
                        An arrangement shall not be treated as 
                        meeting the requirements of 
                        subparagraph (B) or (C) unless such 
                        requirements are met without regard to 
                        subsection (l), and, for purposes of 
                        subsection (l), employer contributions 
                        under subparagraph (B) or (C) shall not 
                        be taken into account.
                  (F) Other plans.--An arrangement shall be 
                treated as meeting the requirements under 
                subparagraph (A)(i) if any other plan 
                maintained by the employer meets such 
                requirements with respect to employees eligible 
                under the arrangement.
          (13) Alternative method for automatic contribution 
        arrangements to meet nondiscrimination requirements.--
                  (A) In general.--A qualified automatic 
                contribution arrangement shall be treated as 
                meeting the requirements of paragraph 
                (3)(A)(ii).
                  (B) Qualified automatic contribution 
                arrangement.--For purposes of this paragraph, 
                the term ``qualified automatic contribution 
                arrangement'' means any cash or deferred 
                arrangement which meets the requirements of 
                subparagraphs (C) through (E).
                  (C) Automatic deferral.--
                          (i) In general.--The requirements of 
                        this subparagraph are met if, under the 
                        arrangement, each employee eligible to 
                        participate in the arrangement is 
                        treated as having elected to have the 
                        employer make elective contributions in 
                        an amount equal to a qualified 
                        percentage of compensation.
                          (ii) Election out.--The election 
                        treated as having been made under 
                        clause (i) shall cease to apply with 
                        respect to any employee if such 
                        employee makes an affirmative 
                        election--
                                  (I) to not have such 
                                contributions made, or
                                  (II) to make elective 
                                contributions at a level 
                                specified in such affirmative 
                                election.
                          (iii) Qualified percentage.--For 
                        purposes of this subparagraph, the term 
                        ``qualified percentage'' means, with 
                        respect to any employee, any percentage 
                        determined under the arrangement if 
                        such percentage is applied uniformly, 
                        does not exceed 10 percent, and is at 
                        least--
                                  (I) 3 percent during the 
                                period ending on the last day 
                                of the first plan year which 
                                begins after the date on which 
                                the first elective contribution 
                                described in clause (i) is made 
                                with respect to such employee,
                                  (II) 4 percent during the 
                                first plan year following the 
                                plan year described in 
                                subclause (I),
                                  (III) 5 percent during the 
                                second plan year following the 
                                plan year described in 
                                subclause (I), and
                                  (IV) 6 percent during any 
                                subsequent plan year.
                          (iv) Automatic deferral for current 
                        employees not required.--Clause (i) may 
                        be applied without taking into account 
                        any employee who--
                                  (I) was eligible to 
                                participate in the arrangement 
                                (or a predecessor arrangement) 
                                immediately before the date on 
                                which such arrangement becomes 
                                a qualified automatic 
                                contribution arrangement 
                                (determined after application 
                                of this clause), and
                                  (II) had an election in 
                                effect on such date either to 
                                participate in the arrangement 
                                or to not participate in the 
                                arrangement.
                  (D) Matching or nonelective contributions.--
                          (i) In general.--The requirements of 
                        this subparagraph are met if, under the 
                        arrangement, the employer--
                                  (I) makes matching 
                                contributions on behalf of each 
                                employee who is not a highly 
                                compensated employee in an 
                                amount equal to the sum of 100 
                                percent of the elective 
                                contributions of the employee 
                                to the extent that such 
                                contributions do not exceed 1 
                                percent of compensation plus 50 
                                percent of so much of such 
                                contributions as exceed 1 
                                percent but do not exceed 6 
                                percent of compensation, or
                                  (II) is required, without 
                                regard to whether the employee 
                                makes an elective contribution 
                                or employee contribution, to 
                                make a contribution to a 
                                defined contribution plan on 
                                behalf of each employee who is 
                                not a highly compensated 
                                employee and who is eligible to 
                                participate in the arrangement 
                                in an amount equal to at least 
                                3 percent of the employee's 
                                compensation.
                          (ii) Application of rules for 
                        matching contributions.--The rules of 
                        clauses (ii) and (iii) of paragraph 
                        (12)(B) shall apply for purposes of 
                        clause (i)(I).
                          (iii) Withdrawal and vesting 
                        restrictions.--An arrangement shall not 
                        be treated as meeting the requirements 
                        of clause (i) unless, with respect to 
                        employer contributions (including 
                        matching contributions) taken into 
                        account in determining whether the 
                        requirements of clause (i) are met--
                                  (I) any employee who has 
                                completed at least 2 years of 
                                service (within the meaning of 
                                section 411(a)) has a 
                                nonforfeitable right to 100 
                                percent of the employee's 
                                accrued benefit derived from 
                                such employer contributions, 
                                and
                                  (II) the requirements of 
                                subparagraph (B) of paragraph 
                                (2) are met with respect to all 
                                such employer contributions.
                          (iv) Application of certain other 
                        rules.--The rules of subparagraphs 
                        (E)(ii) and (F) of paragraph (12) shall 
                        apply for purposes of subclauses (I) 
                        and (II) of clause (i).
                  (E) Notice requirements.--
                          (i) In general.--The requirements of 
                        this subparagraph are met if, within a 
                        reasonable period before each plan 
                        year, each employee eligible to 
                        participate in the arrangement for such 
                        year receives written notice of the 
                        employee's rights and obligations under 
                        the arrangement which--
                                  (I) is sufficiently accurate 
                                and comprehensive to apprise 
                                the employee of such rights and 
                                obligations, and
                                  (II) is written in a manner 
                                calculated to be understood by 
                                the average employee to whom 
                                the arrangement applies.
                          (ii) Timing and content 
                        requirements.--A notice shall not be 
                        treated as meeting the requirements of 
                        clause (i) with respect to an employee 
                        unless--
                                  (I) the notice explains the 
                                employee's right under the 
                                arrangement to elect not to 
                                have elective contributions 
                                made on the employee's behalf 
                                (or to elect to have such 
                                contributions made at a 
                                different percentage),
                                  (II) in the case of an 
                                arrangement under which the 
                                employee may elect among 2 or 
                                more investment options, the 
                                notice explains how 
                                contributions made under the 
                                arrangement will be invested in 
                                the absence of any investment 
                                election by the employee, and
                                  (III) the employee has a 
                                reasonable period of time after 
                                receipt of the notice described 
                                in subclauses (I) and (II) and 
                                before the first elective 
                                contribution is made to make 
                                either such election.
          (14) Special rules relating to hardship 
        withdrawals.--For purposes of paragraph (2)(B)(i)(IV)--
                  (A) Amounts which may be withdrawn.--The 
                following amounts may be distributed upon 
                hardship of the employee:
                          (i) Contributions to a profit-sharing 
                        or stock bonus plan to which section 
                        402(e)(3) applies.
                          (ii) Qualified nonelective 
                        contributions (as defined in subsection 
                        (m)(4)(C)).
                          (iii) Qualified matching 
                        contributions described in paragraph 
                        (3)(D)(ii)(I).
                          (iv) Earnings on any contributions 
                        described in clause (i), (ii), or 
                        (iii).
                  (B) No requirement to take available loan.--A 
                distribution shall not be treated as failing to 
                be made upon the hardship of an employee solely 
                because the employee does not take any 
                available loan under the plan.
  (l) Permitted disparity in plan contributions or benefits.--
          (1) In general.--The requirements of this subsection 
        are met with respect to a plan if--
                  (A) in the case of a defined contribution 
                plan, the requirements of paragraph (2) are 
                met, and
                  (B) in the case of a defined benefit plan, 
                the requirements of paragraph (3) are met.
          (2) Defined contribution plan.--
                  (A) In general.--A defined contribution plan 
                meets the requirements of this paragraph if the 
                excess contribution percentage does not exceed 
                the base contribution percentage by more than 
                the lesser of--
                          (i) the base contribution percentage, 
                        or
                          (ii) the greater of--
                                  (I) 5.7 percentage points, or
                                  (II) the percentage equal to 
                                the portion of the rate of tax 
                                under section 3111(a) (in 
                                effect as of the beginning of 
                                the year) which is attributable 
                                to old-age insurance.
                  (B) Contribution percentages.--For purposes 
                of this paragraph--
                          (i) Excess contribution percentage.--
                        The term ``excess contribution 
                        percentage'' means the percentage of 
                        compensation which is contributed by 
                        the employer under the plan with 
                        respect to that portion of each 
                        participant's compensation in excess of 
                        the integration level.
                          (ii) Base contribution percentage.--
                        The term ``base contribution 
                        percentage'' means the percentage of 
                        compensation contributed by the 
                        employer under the plan with respect to 
                        that portion of each participant's 
                        compensation not in excess of the 
                        integration level.
          (3) Defined benefit plan.--A defined benefit plan 
        meets the requirements of this paragraph if--
                  (A) Excess plans.--
                          (i) In general.--In the case of a 
                        plan other than an offset plan--
                                  (I) the excess benefit 
                                percentage does not exceed the 
                                base benefit percentage by more 
                                than the maximum excess 
                                allowance,
                                  (II) any optional form of 
                                benefit, preretirement benefit, 
                                actuarial factor, or other 
                                benefit or feature provided 
                                with respect to compensation in 
                                excess of the integration level 
                                is provided with respect to 
                                compensation not in excess of 
                                such level, and
                                  (III) benefits are based on 
                                average annual compensation.
                          (ii) Benefit percentages.--For 
                        purposes of this subparagraph, the 
                        excess and base benefit percentages 
                        shall be computed in the same manner as 
                        the excess and base contribution 
                        percentages under paragraph (2)(B), 
                        except that such determination shall be 
                        made on the basis of benefits 
                        attributable to employer contributions 
                        rather than contributions.
                  (B) Offset plans.--In the case of an offset 
                plan, the plan provides that--
                          (i) a participant's accrued benefit 
                        attributable to employer contributions 
                        (within the meaning of section 
                        411(c)(1)) may not be reduced (by 
                        reason of the offset) by more than the 
                        maximum offset allowance, and
                          (ii) benefits are based on average 
                        annual compensation.
          (4) Definitions relating to paragraph (3).--For 
        purposes of paragraph (3)--
                  (A) Maximum excess allowance.--The maximum 
                excess allowance is equal to--
                          (i) in the case of benefits 
                        attributable to any year of service 
                        with the employer taken into account 
                        under the plan, 3/4 of a percentage 
                        point, and
                          (ii) in the case of total benefits, 
                        3/4 of a percentage point, multiplied 
                        by the participant's years of service 
                        (not in excess of 35) with the employer 
                        taken into account under the plan.
                In no event shall the maximum excess allowance 
                exceed the base benefit percentage.
                  (B) Maximum offset allowance.--The maximum 
                offset allowance is equal to--
                          (i) in the case of benefits 
                        attributable to any year of service 
                        with the employer taken into account 
                        under the plan, 3/4 percent of the 
                        participant's final average 
                        compensation, and
                          (ii) in the case of total benefits, 
                        3/4 percent of the participant's final 
                        average compensation, multiplied by the 
                        participant's years of service (not in 
                        excess of 35) with the employer taken 
                        into account under the plan.
                In no event shall the maximum offset allowance 
                exceed 50 percent of the benefit which would 
                have accrued without regard to the offset 
                reduction.
                  (C) Reductions.--
                          (i) In general.--The Secretary shall 
                        prescribe regulations requiring the 
                        reduction of the 3/4 percentage factor 
                        under subparagraph (A) or (B)--
                                  (I) in the case of a plan 
                                other than an offset plan which 
                                has an integration level in 
                                excess of covered compensation, 
                                or
                                  (II) with respect to any 
                                participant in an offset plan 
                                who has final average 
                                compensation in excess of 
                                covered compensation.
                          (ii) Basis of reductions.--Any 
                        reductions under clause (i) shall be 
                        based on the percentages of 
                        compensation replaced by the employer-
                        derived portions of primary insurance 
                        amounts under the Social Security Act 
                        for participants with compensation in 
                        excess of covered compensation.
                  (D) Offset plan.--The term ``offset plan'' 
                means any plan with respect to which the 
                benefit attributable to employer contributions 
                for each participant is reduced by an amount 
                specified in the plan.
          (5) Other definitions and special rules.--For 
        purposes of this subsection--
                  (A) Integration level.--
                          (i) In general.--The term 
                        ``integration level'' means the amount 
                        of compensation specified under the 
                        plan (by dollar amount or formula) at 
                        or below which the rate at which 
                        contributions or benefits are provided 
                        (expressed as a percentage) is less 
                        than such rate above such amount.
                          (ii) Limitation.--The integration 
                        level for any year may not exceed the 
                        contribution and benefit base in effect 
                        under section 230 of the Social 
                        Security Act for such year.
                          (iii) Level to apply to all 
                        participants.--A plan's integration 
                        level shall apply with respect to all 
                        participants in the plan.
                          (iv) Multiple integration levels.--
                        Under rules prescribed by the 
                        Secretary, a defined benefit plan may 
                        specify multiple integration levels.
                  (B) Compensation.--The term ``compensation'' 
                has the meaning given such term by section 
                414(s).
                  (C) Average annual compensation.--The term 
                ``average annual compensation'' means the 
                participant's highest average annual 
                compensation for--
                          (i) any period of at least 3 
                        consecutive years, or
                          (ii) if shorter, the participant's 
                        full period of service.
                  (D) Final average compensation.--
                          (i) In general.--The term ``final 
                        average compensation'' means the 
                        participant's average annual 
                        compensation for--
                                  (I) the 3-consecutive year 
                                period ending with the current 
                                year, or
                                  (II) if shorter, the 
                                participant's full period of 
                                service.
                          (ii) Limitation.--A participant's 
                        final average compensation shall be 
                        determined by not taking into account 
                        in any year compensation in excess of 
                        the contribution and benefit base in 
                        effect under section 230 of the Social 
                        Security Act for such year.
                  (E) Covered compensation.--
                          (i) In general.--The term ``covered 
                        compensation'' means, with respect to 
                        an employee, the average of the 
                        contribution and benefit bases in 
                        effect under section 230 of the Social 
                        Security Act for each year in the 35-
                        year period ending with the year in 
                        which the employee attains the social 
                        security retirement age.
                          (ii) Computation for any year.--For 
                        purposes of clause (i), the 
                        determination for any year preceding 
                        the year in which the employee attains 
                        the social security retirement age 
                        shall be made by assuming that there is 
                        no increase in the bases described in 
                        clause (i) after the determination year 
                        and before the employee attains the 
                        social security retirement age.
                          (iii) Social security retirement 
                        age.--For purposes of this 
                        subparagraph, the term ``social 
                        security retirement age'' has the 
                        meaning given such term by section 
                        415(b)(8).
                  (F) Regulations.--The Secretary shall 
                prescribe such regulations as are necessary or 
                appropriate to carry out the purposes of this 
                subsection, including--
                          (i) in the case of a defined benefit 
                        plan which provides for unreduced 
                        benefits commencing before the social 
                        security retirement age (as defined in 
                        section 415(b)(8)), rules providing for 
                        the reduction of the maximum excess 
                        allowance and the maximum offset 
                        allowance, and
                          (ii) in the case of an employee 
                        covered by 2 or more plans of the 
                        employer which fail to meet the 
                        requirements of subsection (a)(4) 
                        (without regard to this subsection), 
                        rules preventing the multiple use of 
                        the disparity permitted under this 
                        subsection with respect to any 
                        employee.
                For purposes of clause (i), unreduced benefits 
                shall not include benefits for disability 
                (within the meaning of section 223(d) of the 
                Social Security Act).
          (6) Special rule for plan maintained by railroads.--
        In determining whether a plan which includes employees 
        of a railroad employer who are entitled to benefits 
        under the Railroad Retirement Act of 1974 meets the 
        requirements of this subsection, rules similar to the 
        rules set forth in this subsection shall apply. Such 
        rules shall take into account the employer-derived 
        portion of the employees' tier 2 railroad retirement 
        benefits and any supplemental annuity under the 
        Railroad Retirement Act of 1974.
  (m) Nondiscrimination test for matching contributions and 
employee contributions.--
          (1) In general.--A defined contribution plan shall be 
        treated as meeting the requirements of subsection 
        (a)(4) with respect to the amount of any matching 
        contribution or employee contribution for any plan year 
        only if the contribution percentage requirement of 
        paragraph (2) of this subsection is met for such plan 
        year.
          (2) Requirements.--
                  (A) Contribution percentage requirement.--A 
                plan meets the contribution percentage 
                requirement of this paragraph for any plan year 
                only if the contribution percentage for 
                eligible highly compensated employees for such 
                plan year does not exceed the greater of--
                          (i) 125 percent of such percentage 
                        for all other eligible employees for 
                        the preceding plan year, or
                          (ii) the lesser of 200 percent of 
                        such percentage for all other eligible 
                        employees for the preceding plan year, 
                        or such percentage for all other 
                        eligible employees for the preceding 
                        plan year plus 2 percentage points.
                This subparagraph may be applied by using the 
                plan year rather than the preceding plan year 
                if the employer so elects, except that if such 
                an election is made, it may not be changed 
                except as provided by the Secretary.
                  (B) Multiple plans treated as a single 
                plan.--If two or more plans of an employer to 
                which matching contributions, employee 
                contributions, or elective deferrals are made 
                are treated as one plan for purposes of section 
                410(b), such plans shall be treated as one plan 
                for purposes of this subsection. If a highly 
                compensated employee participates in two or 
                more plans of an employer to which 
                contributions to which this subsection applies 
                are made, all such contributions shall be 
                aggregated for purposes of this subsection.
          (3) Contribution percentage.--For purposes of 
        paragraph (2), the contribution percentage for a 
        specified group of employees for a plan year shall be 
        the average of the ratios (calculated separately for 
        each employee in such group) of--
                  (A) the sum of the matching contributions and 
                employee contributions paid under the plan on 
                behalf of each such employee for such plan 
                year, to
                  (B) the employee's compensation (within the 
                meaning of section 414(s)) for such plan year.
        Under regulations, an employer may elect to take into 
        account (in computing the contribution percentage) 
        elective deferrals and qualified nonelective 
        contributions under the plan or any other plan of the 
        employer. If matching contributions are taken into 
        account for purposes of subsection (k)(3)(A)(ii) for 
        any plan year, such contributions shall not be taken 
        into account under subparagraph (A) for such year. 
        Rules similar to the rules of subsection (k)(3)(E) 
        shall apply for purposes of this subsection.
          (4) Definitions.--For purposes of this subsection--
                  (A) Matching contribution.--The term 
                ``matching contribution'' means--
                          (i) any employer contribution made to 
                        a defined contribution plan on behalf 
                        of an employee on account of an 
                        employee contribution made by such 
                        employee, and
                          (ii) any employer contribution made 
                        to a defined contribution plan on 
                        behalf of an employee on account of an 
                        employee's elective deferral.
                  (B) Elective deferral.--The term ``elective 
                deferral'' means any employer contribution 
                described in section 402(g)(3).
                  (C) Qualified nonelective contributions.--The 
                term ``qualified nonelective contribution'' 
                means any employer contribution (other than a 
                matching contribution) with respect to which--
                          (i) the employee may not elect to 
                        have the contribution paid to the 
                        employee in cash instead of being 
                        contributed to the plan, and
                          (ii) the requirements of 
                        subparagraphs (B) and (C) of subsection 
                        (k)(2) are met.
          (5) Employees taken into consideration.--
                  (A) In general.--Any employee who is eligible 
                to make an employee contribution (or, if the 
                employer takes elective contributions into 
                account, elective contributions) or to receive 
                a matching contribution under the plan being 
                tested under paragraph (1) shall be considered 
                an eligible employee for purposes of this 
                subsection.
                  (B) Certain nonparticipants.--If an employee 
                contribution is required as a condition of 
                participation in the plan, any employee who 
                would be a participant in the plan if such 
                employee made such a contribution shall be 
                treated as an eligible employee on behalf of 
                whom no employer contributions are made.
                  (C) Special rule for early participation.--If 
                an employer elects to apply section 
                410(b)(4)(B) in determining whether a plan 
                meets the requirements of section 410(b), the 
                employer may, in determining whether the plan 
                meets the requirements of paragraph (2), 
                exclude from consideration all eligible 
                employees (other than highly compensated 
                employees) who have not met the minimum age and 
                service requirements of section 410(a)(1)(A).
          (6) Plan not disqualified if excess aggregate 
        contributions distributed before end of following plan 
        year.--
                  (A) In general.--A plan shall not be treated 
                as failing to meet the requirements of 
                paragraph (1) for any plan year if, before the 
                close of the following plan year, the amount of 
                the excess aggregate contributions for such 
                plan year (and any income allocable to such 
                contributions through the end of such year) is 
                distributed (or, if forfeitable, is forfeited). 
                Such contributions (and such income) may be 
                distributed without regard to any other 
                provision of law.
                  (B) Excess aggregate contributions.--For 
                purposes of subparagraph (A), the term ``excess 
                aggregate contributions'' means, with respect 
                to any plan year, the excess of--
                          (i) the aggregate amount of the 
                        matching contributions and employee 
                        contributions (and any qualified 
                        nonelective contribution or elective 
                        contribution taken into account in 
                        computing the contribution percentage) 
                        actually made on behalf of highly 
                        compensated employees for such plan 
                        year, over
                          (ii) the maximum amount of such 
                        contributions permitted under the 
                        limitations of paragraph (2)(A) 
                        (determined by reducing contributions 
                        made on behalf of highly compensated 
                        employees in order of their 
                        contribution percentages beginning with 
                        the highest of such percentages).
                  (C) Method of distributing excess aggregate 
                contributions.--Any distribution of the excess 
                aggregate contributions for any plan year shall 
                be made to highly compensated employees on the 
                basis of the amount of contributions on behalf 
                of, or by, each such employee. Forfeitures of 
                excess aggregate contributions may not be 
                allocated to participants whose contributions 
                are reduced under this paragraph.
                  (D) Coordination with subsection (k) and 
                402(g).--The determination of the amount of 
                excess aggregate contributions with respect to 
                a plan shall be made after--
                          (i) first determining the excess 
                        deferrals (within the meaning of 
                        section 402(g)), and
                          (ii) then determining the excess 
                        contributions under subsection (k).
          (7) Treatment of distributions.--
                  (A) Additional tax of section 72(t) not 
                applicable.--No tax shall be imposed under 
                section 72(t) on any amount required to be 
                distributed under paragraph (6).
                  (B) Exclusion of employee contributions.--Any 
                distribution attributable to employee 
                contributions shall not be included in gross 
                income except to the extent attributable to 
                income on such contributions.
          (8) Highly compensated employee.--For purposes of 
        this subsection, the term ``highly compensated 
        employee'' has the meaning given to such term by 
        section 414(q).
          (9) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary to carry out the 
        purposes of this subsection and subsection (k), 
        including regulations permitting appropriate 
        aggregation of plans and contributions.
          (10) Alternative method of satisfying tests.--A 
        defined contribution plan shall be treated as meeting 
        the requirements of paragraph (2) with respect to 
        matching contributions if the plan--
                  (A) meets the contribution requirements of 
                subparagraph (B) of subsection (k)(11),
                  (B) meets the exclusive plan requirements of 
                subsection (k)(11)(C), and
                  (C) meets the vesting requirements of section 
                408(p)(3).
          (11) Additional alternative method of satisfying 
        tests.--
                  (A) In general.--A defined contribution plan 
                shall be treated as meeting the requirements of 
                paragraph (2) with respect to matching 
                contributions if the plan--
                          (i) meets the contribution 
                        requirements of subparagraph (B) or (C) 
                        of subsection (k)(12),
                          (ii) meets the notice requirements of 
                        subsection (k)(12)(D), and
                          (iii) meets the requirements of 
                        subparagraph (B).
                  (B) Limitation on matching contributions.--
                The requirements of this subparagraph are met 
                if--
                          (i) matching contributions on behalf 
                        of any employee may not be made with 
                        respect to an employee's contributions 
                        or elective deferrals in excess of 6 
                        percent of the employee's compensation,
                          (ii) the rate of an employer's 
                        matching contribution does not increase 
                        as the rate of an employee's 
                        contributions or elective deferrals 
                        increase, and
                          (iii) the matching contribution with 
                        respect to any highly compensated 
                        employee at any rate of an employee 
                        contribution or rate of elective 
                        deferral is not greater than that with 
                        respect to an employee who is not a 
                        highly compensated employee.
          (12) Alternative method for automatic contribution 
        arrangements.--A defined contribution plan shall be 
        treated as meeting the requirements of paragraph (2) 
        with respect to matching contributions if the plan--
                  (A) is a qualified automatic contribution 
                arrangement (as defined in subsection (k)(13)), 
                and
                  (B) meets the requirements of paragraph 
                (11)(B).
          (13) Cross reference.--For excise tax on certain 
        excess contributions, see section 4979.
  (n) Coordination with qualified domestic relations orders.--
The Secretary shall prescribe such rules or regulations as may 
be necessary to coordinate the requirements of subsection 
(a)(13)(B) and section 414(p) (and the regulations issued by 
the Secretary of Labor thereunder) with the other provisions of 
this chapter.
  (o) Cross reference.--For exemption from tax of a trust 
qualified under this section, see section 501(a).

SEC. 402. TAXABILITY OF BENEFICIARY OF EMPLOYEES' TRUST.

  (a) Taxability of beneficiary of exempt trust.--Except as 
otherwise provided in this section, any amount actually 
distributed to any distributee by any employees' trust 
described in section 401(a) which is exempt from tax under 
section 501(a) shall be taxable to the distributee, in the 
taxable year of the distributee in which distributed, under 
section 72 (relating to annuities).
  (b) Taxability of beneficiary of nonexempt trust.--
          (1) Contributions.--Contributions to an employees' 
        trust made by an employer during a taxable year of the 
        employer which ends with or within a taxable year of 
        the trust for which the trust is not exempt from tax 
        under section 501(a) shall be included in the gross 
        income of the employee in accordance with section 83 
        (relating to property transferred in connection with 
        performance of services), except that the value of the 
        employee's interest in the trust shall be substituted 
        for the fair market value of the property for purposes 
        of applying such section.
          (2) Distributions.--The amount actually distributed 
        or made available to any distributee by any trust 
        described in paragraph (1) shall be taxable to the 
        distributee, in the taxable year in which so 
        distributed or made available, under section 72 
        (relating to annuities), except that distributions of 
        income of such trust before the annuity starting date 
        (as defined in section 72(c)(4)) shall be included in 
        the gross income of the employee without regard to 
        section 72(e)(5) (relating to amounts not received as 
        annuities).
          (3) Grantor trusts.--A beneficiary of any trust 
        described in paragraph (1) shall not be considered the 
        owner of any portion of such trust under subpart E of 
        part I of subchapter J (relating to grantors and others 
        treated as substantial owners).
          (4) Failure to meet requirements of section 410(b).--
                  (A) Highly compensated employees.--If 1 of 
                the reasons a trust is not exempt from tax 
                under section 501(a) is the failure of the plan 
                of which it is a part to meet the requirements 
                of section 401(a)(26) or 410(b), then a highly 
                compensated employee shall, in lieu of the 
                amount determined under paragraph (1) or (2) 
                include in gross income for the taxable year 
                with or within which the taxable year of the 
                trust ends an amount equal to the vested 
                accrued benefit of such employee (other than 
                the employee's investment in the contract) as 
                of the close of such taxable year of the trust.
                  (B) Failure to meet coverage tests.--If a 
                trust is not exempt from tax under section 
                501(a) for any taxable year solely because such 
                trust is part of a plan which fails to meet the 
                requirements of section 401(a)(26) or 410(b), 
                paragraphs (1) and (2) shall not apply by 
                reason of such failure to any employee who was 
                not a highly compensated employee during--
                          (i) such taxable year, or
                          (ii) any preceding period for which 
                        service was creditable to such employee 
                        under the plan.
                  (C) Highly compensated employee.--For 
                purposes of this paragraph, the term ``highly 
                compensated employee'' has the meaning given 
                such term by section 414(q).
  (c) Rules applicable to rollovers from exempt trusts.--
          (1) Exclusion from income.--If--
                  (A) any portion of the balance to the credit 
                of an employee in a qualified trust is paid to 
                the employee in an eligible rollover 
                distribution,
                  (B) the distributee transfers any portion of 
                the property received in such distribution to 
                an eligible retirement plan, and
                  (C) in the case of a distribution of property 
                other than money, the amount so transferred 
                consists of the property distributed,
        then such distribution (to the extent so transferred) 
        shall not be includible in gross income for the taxable 
        year in which paid.
          (2) Maximum amount which may be rolled over.--In the 
        case of any eligible rollover distribution, the maximum 
        amount transferred to which paragraph (1) applies shall 
        not exceed the portion of such distribution which is 
        includible in gross income (determined without regard 
        to paragraph (1)). The preceding sentence shall not 
        apply to such distribution to the extent--
                  (A) such portion is transferred in a direct 
                trustee-to-trustee transfer to a qualified 
                trust or to an annuity contract described in 
                section 403(b) and such trust or contract 
                provides for separate accounting for amounts so 
                transferred (and earnings thereon), including 
                separately accounting for the portion of such 
                distribution which is includible in gross 
                income and the portion of such distribution 
                which is not so includible, or
                  (B) such portion is transferred to an 
                eligible retirement plan described in clause 
                (i) or (ii) of paragraph (8)(B).
        In the case of a transfer described in subparagraph (A) 
        or (B), the amount transferred shall be treated as 
        consisting first of the portion of such distribution 
        that is includible in gross income (determined without 
        regard to paragraph (1)).
          (3) Time limit on transfers.--
                  (A) In general.--Except as provided in 
                subparagraphs (B) and (C), paragraph (1) shall 
                not apply to any transfer of a distribution 
                made after the 60th day following the day on 
                which the distributee received the property 
                distributed.
                  (B) Hardship exception.--The Secretary may 
                waive the 60-day requirement under subparagraph 
                (A) where the failure to waive such requirement 
                would be against equity or good conscience, 
                including casualty, disaster, or other events 
                beyond the reasonable control of the individual 
                subject to such requirement.
                  (C) Rollover of certain plan loan offset 
                amounts.--
                          (i) In general.--In the case of a 
                        qualified plan loan offset amount, 
                        paragraph (1) shall not apply to any 
                        transfer of such amount made after the 
                        due date (including extensions) for 
                        filing the return of tax for the 
                        taxable year in which such amount is 
                        treated as distributed from a qualified 
                        employer plan.
                          (ii) Qualified plan loan offset 
                        amount.--For purposes of this 
                        subparagraph, the term ``qualified plan 
                        loan offset amount'' means a plan loan 
                        offset amount which is treated as 
                        distributed from a qualified employer 
                        plan to a participant or beneficiary 
                        solely by reason of--
                                  (I) the termination of the 
                                qualified employer plan, or
                                  (II) the failure to meet the 
                                repayment terms of the loan 
                                from such plan because of the 
                                severance from employment of 
                                the participant.
                          (iii) Plan loan offset amount.--For 
                        purposes of clause (ii), the term 
                        ``plan loan offset amount'' means the 
                        amount by which the participant's 
                        accrued benefit under the plan is 
                        reduced in order to repay a loan from 
                        the plan.
                          (iv) Limitation.--This subparagraph 
                        shall not apply to any plan loan offset 
                        amount unless such plan loan offset 
                        amount relates to a loan to which 
                        section 72(p)(1) does not apply by 
                        reason of section 72(p)(2).
                          (v) Qualified employer plan.--For 
                        purposes of this subsection, the term 
                        ``qualified employer plan'' has the 
                        meaning given such term by section 
                        72(p)(4).
          (4) Eligible rollover distribution.--For purposes of 
        this subsection, the term ``eligible rollover 
        distribution'' means any distribution to an employee of 
        all or any portion of the balance to the credit of the 
        employee in a qualified trust; except that such term 
        shall not include--
                  (A) any distribution which is one of a series 
                of substantially equal periodic payments (not 
                less frequently than annually) made--
                          (i) for the life (or life expectancy) 
                        of the employee or the joint lives (or 
                        joint life expectancies) of the 
                        employee and the employee's designated 
                        beneficiary, or
                          (ii) for a specified period of 10 
                        years or more,
                  (B) any distribution to the extent such 
                distribution is required under section 
                401(a)(9), and
                  (C) any distribution which is made upon 
                hardship of the employee.
        If all or any portion of a distribution during 2009 is 
        treated as an eligible rollover distribution but would 
        not be so treated if the minimum distribution 
        requirements under section 401(a)(9) had applied during 
        2009, such distribution shall not be treated as an 
        eligible rollover distribution for purposes of section 
        401(a)(31) or 3405(c) or subsection (f) of this 
        section.
          (5) Transfer treated as rollover contribution under 
        section 408.--For purposes of this title, a transfer to 
        an eligible retirement plan described in clause (i) or 
        (ii) of paragraph (8)(B) resulting in any portion of a 
        distribution being excluded from gross income under 
        paragraph (1) shall be treated as a rollover 
        contribution described in section 408(d)(3).
          (6) Sales of distributed property.--For purposes of 
        this subsection--
                  (A) Transfer of proceeds from sale of 
                distributed property treated as transfer of 
                distributed property.--The transfer of an 
                amount equal to any portion of the proceeds 
                from the sale of property received in the 
                distribution shall be treated as the transfer 
                of property received in the distribution.
                  (B) Proceeds attributable to increase in 
                value.--The excess of fair market value of 
                property on sale over its fair market value on 
                distribution shall be treated as property 
                received in the distribution.
                  (C) Designation where amount of distribution 
                exceeds rollover contribution.--In any case 
                where part or all of the distribution consists 
                of property other than money--
                          (i) the portion of the money or other 
                        property which is to be treated as 
                        attributable to amounts not included in 
                        gross income, and
                          (ii) the portion of the money or 
                        other property which is to be treated 
                        as included in the rollover 
                        contribution,
                shall be determined on a ratable basis unless 
                the taxpayer designates otherwise. Any 
                designation under this subparagraph for a 
                taxable year shall be made not later than the 
                time prescribed by law for filing the return 
                for such taxable year (including extensions 
                thereof). Any such designation, once made, 
                shall be irrevocable.
                  (D) Nonrecognition of gain or loss.--No gain 
                or loss shall be recognized on any sale 
                described in subparagraph (A) to the extent 
                that an amount equal to the proceeds is 
                transferred pursuant to paragraph (1).
          (7) Special rule for frozen deposits.--
                  (A) In general.--The 60-day period described 
                in paragraph (3) shall not--
                          (i) include any period during which 
                        the amount transferred to the employee 
                        is a frozen deposit, or
                          (ii) end earlier than 10 days after 
                        such amount ceases to be a frozen 
                        deposit.
                  (B) Frozen deposits.--For purposes of this 
                subparagraph, the term ``frozen deposit'' means 
                any deposit which may not be withdrawn because 
                of--
                          (i) the bankruptcy or insolvency of 
                        any financial institution, or
                          (ii) any requirement imposed by the 
                        State in which such institution is 
                        located by reason of the bankruptcy or 
                        insolvency (or threat thereof) of 1 or 
                        more financial institutions in such 
                        State.
                A deposit shall not be treated as a frozen 
                deposit unless on at least 1 day during the 60-
                day period described in paragraph (3) (without 
                regard to this paragraph) such deposit is 
                described in the preceding sentence.
          (8) Definitions.--For purposes of this subsection--
                  (A) Qualified trust.--The term ``qualified 
                trust'' means an employees' trust described in 
                section 401(a) which is exempt from tax under 
                section 501(a).
                  (B) Eligible retirement plan.--The term 
                ``eligible retirement plan'' means--
                          (i) an individual retirement account 
                        described in section 408(a),
                          (ii) an individual retirement annuity 
                        described in section 408(b) (other than 
                        an endowment contract),
                          (iii) a qualified trust,
                          (iv) an annuity plan described in 
                        section 403(a),
                          (v) an eligible deferred compensation 
                        plan described in section 457(b) which 
                        is maintained by an eligible employer 
                        described in section 457(e)(1)(A), and
                          (vi) an annuity contract described in 
                        section 403(b).
                If any portion of an eligible rollover 
                distribution is attributable to payments or 
                distributions from a designated Roth account 
                (as defined in section 402A), an eligible 
                retirement plan with respect to such portion 
                shall include only another designated Roth 
                account and a Roth IRA.
          (9) Rollover where spouse receives distribution after 
        death of employee.--If any distribution attributable to 
        an employee is paid to the spouse of the employee after 
        the employee's death, the preceding provisions of this 
        subsection shall apply to such distribution in the same 
        manner as if the spouse were the employee.
          (10) Separate accounting.--Unless a plan described in 
        clause (v) of paragraph (8)(B) agrees to separately 
        account for amounts rolled into such plan from eligible 
        retirement plans not described in such clause, the plan 
        described in such clause may not accept transfers or 
        rollovers from such retirement plans.
          (11) Distributions to inherited individual retirement 
        plan of nonspouse beneficiary.--
                  (A) In general.--If, with respect to any 
                portion of a distribution from an eligible 
                retirement plan described in paragraph 
                (8)(B)(iii) of a deceased employee, a direct 
                trustee-to-trustee transfer is made to an 
                individual retirement plan described in clause 
                (i) or (ii) of paragraph (8)(B) established for 
                the purposes of receiving the distribution on 
                behalf of an individual who is a designated 
                beneficiary (as defined by section 
                401(a)(9)(E)) of the employee and who is not 
                the surviving spouse of the employee--
                          (i) the transfer shall be treated as 
                        an eligible rollover distribution,
                          (ii) the individual retirement plan 
                        shall be treated as an inherited 
                        individual retirement account or 
                        individual retirement annuity (within 
                        the meaning of section 408(d)(3)(C)) 
                        for purposes of this title, and
                          (iii) section 401(a)(9)(B) (other 
                        than clause (iv) thereof) shall apply 
                        to such plan.
                  (B) Certain trusts treated as 
                beneficiaries.--For purposes of this paragraph, 
                to the extent provided in rules prescribed by 
                the Secretary, a trust maintained for the 
                benefit of one or more designated beneficiaries 
                shall be treated in the same manner as a 
                designated beneficiary.
  (d) Taxability of beneficiary of certain foreign situs 
trusts.--For purposes of subsections (a), (b), and (c), a stock 
bonus, pension, or profit-sharing trust which would qualify for 
exemption from tax under section 501(a) except for the fact 
that it is a trust created or organized outside the United 
States shall be treated as if it were a trust exempt from tax 
under section 501(a).
  (e) Other rules applicable to exempt trusts.--
          (1) Alternate payees.--
                  (A) Alternate payee treated as distributee.--
                For purposes of subsection (a) and section 72, 
                an alternate payee who is the spouse or former 
                spouse of the participant shall be treated as 
                the distributee of any distribution or payment 
                made to the alternate payee under a qualified 
                domestic relations order (as defined in section 
                414(p)).
                  (B) Rollovers.--If any amount is paid or 
                distributed to an alternate payee who is the 
                spouse or former spouse of the participant by 
                reason of any qualified domestic relations 
                order (within the meaning of section 414(p)), 
                subsection (c) shall apply to such distribution 
                in the same manner as if such alternate payee 
                were the employee.
          (2) Distributions by United States to nonresident 
        aliens.--The amount includible under subsection (a) in 
        the gross income of a nonresident alien with respect to 
        a distribution made by the United States in respect of 
        services performed by an employee of the United States 
        shall not exceed an amount which bears the same ratio 
        to the amount includible in gross income without regard 
        to this paragraph as--
                  (A) the aggregate basic pay paid by the 
                United States to such employee for such 
                services, reduced by the amount of such basic 
                pay which was not includible in gross income by 
                reason of being from sources without the United 
                States, bears to
                  (B) the aggregate basic pay paid by the 
                United States to such employee for such 
                services.
        In the case of distributions under the civil service 
        retirement laws, the term ``basic pay'' shall have the 
        meaning provided in section 8331(3) of title 5, United 
        States Code.
          (3) Cash or deferred arrangements.--For purposes of 
        this title, contributions made by an employer on behalf 
        of an employee to a trust which is a part of a 
        qualified cash or deferred arrangement (as defined in 
        section 401(k)(2)) or which is part of a salary 
        reduction agreement under section 403(b) shall not be 
        treated as distributed or made available to the 
        employee nor as contributions made to the trust by the 
        employee merely because the arrangement includes 
        provisions under which the employee has an election 
        whether the contribution will be made to the trust or 
        received by the employee in cash.
          (4) Net unrealized appreciation.--
                  (A) Amounts attributable to employee 
                contributions.--For purposes of subsection (a) 
                and section 72, in the case of a distribution 
                other than a lump sum distribution, the amount 
                actually distributed to any distributee from a 
                trust described in subsection (a) shall not 
                include any net unrealized appreciation in 
                securities of the employer corporation 
                attributable to amounts contributed by the 
                employee (other than deductible employee 
                contributions within the meaning of section 
                72(o)(5)). This subparagraph shall not apply to 
                a distribution to which subsection (c) applies.
                  (B) Amounts attributable to employer 
                contributions.--For purposes of subsection (a) 
                and section 72, in the case of any lump sum 
                distribution which includes securities of the 
                employer corporation, there shall be excluded 
                from gross income the net unrealized 
                appreciation attributable to that part of the 
                distribution which consists of securities of 
                the employer corporation. In accordance with 
                rules prescribed by the Secretary, a taxpayer 
                may elect, on the return of tax on which a lump 
                sum distribution is required to be included, 
                not to have this subparagraph apply to such 
                distribution.
                  (C) Determination of amounts and 
                adjustments.--For purposes of subparagraphs (A) 
                and (B), net unrealized appreciation and the 
                resulting adjustments to basis shall be 
                determined in accordance with regulations 
                prescribed by the Secretary.
                  (D) Lump-sum distribution.--For purposes of 
                this paragraph--
                          (i) In general.--The term ``lump-sum 
                        distribution'' means the distribution 
                        or payment within one taxable year of 
                        the recipient of the balance to the 
                        credit of an employee which becomes 
                        payable to the recipient--
                                  (I) on account of the 
                                employee's death,
                                  (II) after the employee 
                                attains age 591/2,
                                  (III) on account of the 
                                employee's separation from 
                                service, or
                                  (IV) after the employee has 
                                become disabled (within the 
                                meaning of section 72(m)(7)),
                 from a trust which forms a part of a plan 
                described in section 401(a) and which is exempt 
                from tax under section 501 or from a plan 
                described in section 403(a). Subclause (III) of 
                this clause shall be applied only with respect 
                to an individual who is an employee without 
                regard to section 401(c)(1), and subclause (IV) 
                shall be applied only with respect to an 
                employee within the meaning of section 
                401(c)(1). For purposes of this clause, a 
                distribution to two or more trusts shall be 
                treated as a distribution to one recipient. For 
                purposes of this paragraph, the balance to the 
                credit of the employee does not include the 
                accumulated deductible employee contributions 
                under the plan (within the meaning of section 
                72(o)(5)).
                          (ii) Aggregation of certain trusts 
                        and plans.--For purposes of determining 
                        the balance to the credit of an 
                        employee under clause (i)--
                                  (I) all trusts which are part 
                                of a plan shall be treated as a 
                                single trust, all pension plans 
                                maintained by the employer 
                                shall be treated as a single 
                                plan, all profit-sharing plans 
                                maintained by the employer 
                                shall be treated as a single 
                                plan, and all stock bonus plans 
                                maintained by the employer 
                                shall be treated as a single 
                                plan, and
                                  (II) trusts which are not 
                                qualified trusts under section 
                                401(a) and annuity contracts 
                                which do not satisfy the 
                                requirements of section 
                                404(a)(2) shall not be taken 
                                into account.
                          (iii) Community property laws.--The 
                        provisions of this paragraph shall be 
                        applied without regard to community 
                        property laws.
                          (iv) Amounts subject to penalty.--
                        This paragraph shall not apply to 
                        amounts described in subparagraph (A) 
                        of section 72(m)(5) to the extent that 
                        section 72(m)(5) applies to such 
                        amounts.
                          (v) Balance to credit of employee not 
                        to include amounts payable under 
                        qualified domestic relations order.--
                        For purposes of this paragraph, the 
                        balance to the credit of an employee 
                        shall not include any amount payable to 
                        an alternate payee under a qualified 
                        domestic relations order (within the 
                        meaning of section 414(p)).
                          (vi) Transfers to cost-of-living 
                        arrangement not treated as 
                        distribution.--For purposes of this 
                        paragraph, the balance to the credit of 
                        an employee under a defined 
                        contribution plan shall not include any 
                        amount transferred from such defined 
                        contribution plan to a qualified cost-
                        of-living arrangement (within the 
                        meaning of section 415(k)(2)) under a 
                        defined benefit plan.
                          (vii) Lump-sum distributions of 
                        alternate payees.--If any distribution 
                        or payment of the balance to the credit 
                        of an employee would be treated as a 
                        lump-sum distribution, then, for 
                        purposes of this paragraph, the payment 
                        under a qualified domestic relations 
                        order (within the meaning of section 
                        414(p)) of the balance to the credit of 
                        an alternate payee who is the spouse or 
                        former spouse of the employee shall be 
                        treated as a lump-sum distribution. For 
                        purposes of this clause, the balance to 
                        the credit of the alternate payee shall 
                        not include any amount payable to the 
                        employee.
                  (E) Definitions relating to securities.--For 
                purposes of this paragraph--
                          (i) Securities.--The term 
                        ``securities'' means only shares of 
                        stock and bonds or debentures issued by 
                        a corporation with interest coupons or 
                        in registered form.
                          (ii) Securities of the employer.--The 
                        term ``securities of the employer 
                        corporation'' includes securities of a 
                        parent or subsidiary corporation (as 
                        defined in subsections (e) and (f) of 
                        section 424) of the employer 
                        corporation.
          (6) Direct trustee-to-trustee transfers.--Any amount 
        transferred in a direct trustee-to-trustee transfer in 
        accordance with section 401(a)(31) shall not be 
        includible in gross income for the taxable year of such 
        transfer.
  (f) Written explanation to recipients of distributions 
eligible for rollover treatment.--
          (1) In general.--The plan administrator of any plan 
        shall, within a reasonable period of time before making 
        an eligible rollover distribution, provide a written 
        explanation to the recipient--
                  (A) of the provisions under which the 
                recipient may have the distribution directly 
                transferred to an eligible retirement plan and 
                that the automatic distribution by direct 
                transfer applies to certain distributions in 
                accordance with section 401(a)(31)(B),
                  (B) of the provision which requires the 
                withholding of tax on the distribution if it is 
                not directly transferred to an eligible 
                retirement plan,
                  (C) of the provisions under which the 
                distribution will not be subject to tax if 
                transferred to an eligible retirement plan 
                within 60 days after the date on which the 
                recipient received the distribution,
                  (D) if applicable, of the provisions of 
                subsections (d) and (e) of this section, and
                  (E) of the provisions under which 
                distributions from the eligible retirement plan 
                receiving the distribution may be subject to 
                restrictions and tax consequences which are 
                different from those applicable to 
                distributions from the plan making such 
                distribution.
          (2) Definitions.--For purposes of this subsection--
                  (A) Eligible rollover distribution.--The term 
                ``eligible rollover distribution'' has the same 
                meaning as when used in subsection (c) of this 
                section, paragraph (4) of section 403(a), 
                subparagraph (A) of section 403(b)(8), or 
                subparagraph (A) of section 457(e)(16). Such 
                term shall include any distribution to a 
                designated beneficiary which would be treated 
                as an eligible rollover distribution by reason 
                of subsection (c)(11), or section 403(a)(4)(B), 
                403(b)(8)(B), or 457(e)(16)(B), if the 
                requirements of subsection (c)(11) were 
                satisfied.
                  (B) Eligible retirement plan.--The term 
                ``eligible retirement plan'' has the meaning 
                given such term by subsection (c)(8)(B).
  (g) Limitation on exclusion for elective deferrals.--
          (1) In general.--
                  (A) Limitation.--Notwithstanding subsections 
                (e)(3) and (h)(1)(B), the elective deferrals of 
                any individual for any taxable year shall be 
                included in such individual's gross income to 
                the extent the amount of such deferrals for the 
                taxable year exceeds the applicable dollar 
                amount. The preceding sentence shall not apply 
                to the portion of such excess as does not 
                exceed the designated Roth contributions of the 
                individual for the taxable year.
                  (B) Applicable dollar amount.--For purposes 
                of subparagraph (A), the applicable dollar 
                amount is $15,000.
                  (C) Catch-up contributions.--In addition to 
                subparagraph (A), in the case of an eligible 
                participant (as defined in section 414(v)), 
                gross income shall not include elective 
                deferrals in excess of the applicable dollar 
                amount under subparagraph (B) to the extent 
                that the amount of such elective deferrals does 
                not exceed the applicable dollar amount under 
                section 414(v)(2)(B)(i) for the taxable year 
                (without regard to the treatment of the 
                elective deferrals by an applicable employer 
                plan under section 414(v)).
          (2) Distribution of excess deferrals.--
                  (A) In general.--If any amount (hereinafter 
                in this paragraph referred to as ``excess 
                deferrals'') is included in the gross income of 
                an individual under paragraph (1) (or would be 
                included but for the last sentence thereof) for 
                any taxable year--
                          (i) not later than the 1st March 1 
                        following the close of the taxable 
                        year, the individual may allocate the 
                        amount of such excess deferrals among 
                        the plans under which the deferrals 
                        were made and may notify each such plan 
                        of the portion allocated to it, and
                          (ii) not later than the 1st April 15 
                        following the close of the taxable 
                        year, each such plan may distribute to 
                        the individual the amount allocated to 
                        it under clause (i) (and any income 
                        allocable to such amount through the 
                        end of such taxable year).
                The distribution described in clause (ii) may 
                be made notwithstanding any other provision of 
                law.
                  (B) Treatment of distribution under section 
                401(k).--Except to the extent provided under 
                rules prescribed by the Secretary, 
                notwithstanding the distribution of any portion 
                of an excess deferral from a plan under 
                subparagraph (A)(ii), such portion shall, for 
                purposes of applying section 401(k)(3)(A)(ii), 
                be treated as an employer contribution.
                  (C) Taxation of distribution.--In the case of 
                a distribution to which subparagraph (A) 
                applies--
                          (i) except as provided in clause 
                        (ii), such distribution shall not be 
                        included in gross income, and
                          (ii) any income on the excess 
                        deferral shall, for purposes of this 
                        chapter, be treated as earned and 
                        received in the taxable year in which 
                        such income is distributed.
                No tax shall be imposed under section 72(t) on 
                any distribution described in the preceding 
                sentence.
                  (D) Partial distributions.--If a plan 
                distributes only a portion of any excess 
                deferral and income allocable thereto, such 
                portion shall be treated as having been 
                distributed ratably from the excess deferral 
                and the income.
          (3) Elective deferrals.--For purposes of this 
        subsection, the term ``elective deferrals'' means, with 
        respect to any taxable year, the sum of--
                  (A) any employer contribution under a 
                qualified cash or deferred arrangement (as 
                defined in section 401(k)) to the extent not 
                includible in gross income for the taxable year 
                under subsection (e)(3) (determined without 
                regard to this subsection),
                  (B) any employer contribution to the extent 
                not includible in gross income for the taxable 
                year under subsection (h)(1)(B) (determined 
                without regard to this subsection),
                  (C) any employer contribution to purchase an 
                annuity contract under section 403(b) under a 
                salary reduction agreement (within the meaning 
                of section 3121(a)(5)(D)), and
                  (D) any elective employer contribution under 
                section 408(p)(2)(A)(i).
        An employer contribution shall not be treated as an 
        elective deferral described in subparagraph (C) if 
        under the salary reduction agreement such contribution 
        is made pursuant to a one-time irrevocable election 
        made by the employee at the time of initial eligibility 
        to participate in the agreement or is made pursuant to 
        a similar arrangement involving a one-time irrevocable 
        election specified in regulations.
          (4) Cost-of-living adjustment.--In the case of 
        taxable years beginning after December 31, 2006, the 
        Secretary shall adjust the $15,000 amount under 
        paragraph (1)(B) at the same time and in the same 
        manner as under section 415(d), except that the base 
        period shall be the calendar quarter beginning July 1, 
        2005, and any increase under this paragraph which is 
        not a multiple of $500 shall be rounded to the next 
        lowest multiple of $500.
          (5) Disregard of community property laws.--This 
        subsection shall be applied without regard to community 
        property laws.
          (6) Coordination with section 72.--For purposes of 
        applying section 72, any amount includible in gross 
        income for any taxable year under this subsection but 
        which is not distributed from the plan during such 
        taxable year shall not be treated as investment in the 
        contract.
          (7) Special rule for certain organizations.--
                  (A) In general.--In the case of a qualified 
                employee of a qualified organization, with 
                respect to employer contributions described in 
                paragraph (3)(C) made by such organization, the 
                limitation of paragraph (1) for any taxable 
                year shall be increased by whichever of the 
                following is the least:
                          (i) $3,000,
                          (ii) $15,000 reduced by the sum of--
                                  (I) the amounts not included 
                                in gross income for prior 
                                taxable years by reason of this 
                                paragraph, plus
                                  (II) the aggregate amount of 
                                designated Roth contributions 
                                (as defined in section 402A(c)) 
                                permitted for prior taxable 
                                years by reason of this 
                                paragraph, or
                          (iii) the excess of $5,000 multiplied 
                        by the number of years of service of 
                        the employee with the qualified 
                        organization over the employer 
                        contributions described in paragraph 
                        (3) made by the organization on behalf 
                        of such employee for prior taxable 
                        years (determined in the manner 
                        prescribed by the Secretary).
                  (B) Qualified organization.--For purposes of 
                this paragraph, the term ``qualified 
                organization'' means any educational 
                organization, hospital, home health service 
                agency, health and welfare service agency, 
                church, or convention or association of 
                churches. Such term includes any organization 
                described in section 414(e)(3)(B)(ii). Terms 
                used in this subparagraph shall have the same 
                meaning as when used in section 415(c)(4) (as 
                in effect before the enactment of the Economic 
                Growth and Tax Relief Reconciliation Act of 
                2001).
                  (C) Qualified employee.--For purposes of this 
                paragraph, the term ``qualified employee'' 
                means any employee who has completed 15 years 
                of service with the qualified organization.
                  (D) Years of service.--For purposes of this 
                paragraph, the term ``years of service'' has 
                the meaning given such term by section 403(b).
          (8) Matching contributions on behalf of self-employed 
        individuals not treated as elective employer 
        contributions.--Except as provided in section 
        401(k)(3)(D)(ii), any matching contribution described 
        in section 401(m)(4)(A) which is made on behalf of a 
        self-employed individual (as defined in section 401(c)) 
        shall not be treated as an elective employer 
        contribution under a qualified cash or deferred 
        arrangement (as defined in section 401(k)) for purposes 
        of this title.
  (h) Special rules for simplified employee pensions.--For 
purposes of this chapter--
          (1) In general.--Except as provided in paragraph (2), 
        contributions made by an employer on behalf of an 
        employee to an individual retirement plan pursuant to a 
        simplified employee pension (as defined in section 
        408(k))--
                  (A) shall not be treated as distributed or 
                made available to the employee or as 
                contributions made by the employee, and
                  (B) if such contributions are made pursuant 
                to an arrangement under section 408(k)(6) under 
                which an employee may elect to have the 
                employer make contributions to the simplified 
                employee pension on behalf of the employee, 
                shall not be treated as distributed or made 
                available or as contributions made by the 
                employee merely because the simplified employee 
                pension includes provisions for such election.
          (2) Limitations on employer contributions.--
        Contributions made by an employer to a simplified 
        employee pension with respect to an employee for any 
        year shall be treated as distributed or made available 
        to such employee and as contributions made by the 
        employee to the extent such contributions exceed the 
        lesser of--
                  (A) 25 percent of the compensation (within 
                the meaning of section 414(s)) from such 
                employer includible in the employee's gross 
                income for the year (determined without regard 
                to the employer contributions to the simplified 
                employee pension), or
                  (B) the limitation in effect under section 
                415(c)(1)(A), reduced in the case of any highly 
                compensated employee (within the meaning of 
                section 414(q)) by the amount taken into 
                account with respect to such employee under 
                section 408(k)(3)(D).
          (3) Distributions.--Any amount paid or distributed 
        out of an individual retirement plan pursuant to a 
        simplified employee pension shall be included in gross 
        income by the payee or distributee, as the case may be, 
        in accordance with the provisions of section 408(d).
  (i) Treatment of self-employed individuals.--For purposes of 
this section, except as otherwise provided in subsection 
(e)(4)(D)(i), the term ``employee'' includes a self-employed 
individual (as defined in section 401(c)(1)(B)) and the 
employer of such individual shall be the person treated as his 
employer under section 401(c)(4).
  (j) Effect of disposition of stock by plan on net unrealized 
appreciation.--
          (1) In general.--For purposes of subsection (e)(4), 
        in the case of any transaction to which this subsection 
        applies, the determination of net unrealized 
        appreciation shall be made without regard to such 
        transaction.
          (2) Transaction to which subsection applies.--This 
        subsection shall apply to any transaction in which--
                  (A) the plan trustee exchanges the plan's 
                securities of the employer corporation for 
                other such securities, or
                  (B) the plan trustee disposes of securities 
                of the employer corporation and uses the 
                proceeds of such disposition to acquire 
                securities of the employer corporation within 
                90 days (or such longer period as the Secretary 
                may prescribe), except that this subparagraph 
                shall not apply to any employee with respect to 
                whom a distribution of money was made during 
                the period after such disposition and before 
                such acquisition.
  (k) Treatment of simple retirement accounts.--Rules similar 
to the rules of paragraphs (1) and (3) of subsection (h) shall 
apply to contributions and distributions with respect to a 
simple retirement account under section 408(p).
  (l) Distributions from governmental plans for health and 
long-term care insurance.--
          (1) In general.--In the case of an employee who is an 
        eligible retired public safety officer who makes the 
        election described in paragraph (6) with respect to any 
        taxable year of such employee, gross income of such 
        employee for such taxable year does not include any 
        distribution from an eligible retirement plan 
        maintained by the employer described in paragraph 
        (4)(B) to the extent that the aggregate amount of such 
        distributions does not exceed the amount paid by such 
        employee for qualified health insurance premiums for 
        such taxable year.
          (2) Limitation.--The amount which may be excluded 
        from gross income for the taxable year by reason of 
        paragraph (1) shall not exceed $3,000.
          (3) Distributions must otherwise be includible.--
                  (A) In general.--An amount shall be treated 
                as a distribution for purposes of paragraph (1) 
                only to the extent that such amount would be 
                includible in gross income without regard to 
                paragraph (1).
                  (B) Application of section 72.--
                Notwithstanding section 72, in determining the 
                extent to which an amount is treated as a 
                distribution for purposes of subparagraph (A), 
                the aggregate amounts distributed from an 
                eligible retirement plan in a taxable year (up 
                to the amount excluded under paragraph (1)) 
                shall be treated as includible in gross income 
                (without regard to subparagraph (A)) to the 
                extent that such amount does not exceed the 
                aggregate amount which would have been so 
                includible if all amounts to the credit of the 
                eligible public safety officer in all eligible 
                retirement plans maintained by the employer 
                described in paragraph (4)(B) were distributed 
                during such taxable year and all such plans 
                were treated as 1 contract for purposes of 
                determining under section 72 the aggregate 
                amount which would have been so includible. 
                Proper adjustments shall be made in applying 
                section 72 to other distributions in such 
                taxable year and subsequent taxable years.
          (4) Definitions.--For purposes of this subsection--
                  (A) Eligible retirement plan.--For purposes 
                of paragraph (1), the term ``eligible 
                retirement plan'' means a governmental plan 
                (within the meaning of section 414(d)) which is 
                described in clause (iii), (iv), (v), or (vi) 
                of subsection (c)(8)(B).
                  (B) Eligible retired public safety officer.--
                The term ``eligible retired public safety 
                officer'' means an individual who, by reason of 
                disability or attainment of normal retirement 
                age, is separated from service as a public 
                safety officer with the employer who maintains 
                the eligible retirement plan from which 
                distributions subject to paragraph (1) are 
                made.
                  (C) Public safety officer.--The term ``public 
                safety officer'' shall have the same meaning 
                given such term by section 1204(9)(A) of the 
                Omnibus Crime Control and Safe Streets Act of 
                1968 (42 U.S.C. 3796b(9)(A)), as in effect 
                immediately before the enactment of the 
                National Defense Authorization Act for Fiscal 
                Year 2013.
                  (D) Qualified health insurance premiums.--The 
                term ``qualified health insurance premiums'' 
                means premiums for coverage for the eligible 
                retired public safety officer[, his spouse, and 
                dependents] and the spouse and dependents of 
                such officer (as defined in section 152), by an 
                accident or health plan or qualified long-term 
                care insurance contract (as defined in section 
                7702B(b)).
          (5) Special rules.--For purposes of this subsection--
                  (A) Direct payment to insurer required.--
                Paragraph (1) shall only apply to a 
                distribution if payment of the premiums is made 
                directly to the provider of the accident or 
                health plan or qualified long-term care 
                insurance contract by deduction from a 
                distribution from the eligible retirement plan.
                  (B) Related plans treated as 1.--All eligible 
                retirement plans of an employer shall be 
                treated as a single plan.
          (6) Election described.--
                  (A) In general.--For purposes of paragraph 
                (1), an election is described in this paragraph 
                if the election is made by an employee after 
                separation from service with respect to amounts 
                not distributed from an eligible retirement 
                plan to have amounts from such plan distributed 
                in order to pay for qualified health insurance 
                premiums.
                  (B) Special rule.--A plan shall not be 
                treated as violating the requirements of 
                section 401, or as engaging in a prohibited 
                transaction for purposes of section 503(b), 
                merely because it provides for an election with 
                respect to amounts that are otherwise 
                distributable under the plan or merely because 
                of a distribution made pursuant to an election 
                described in subparagraph (A).
          (7) Coordination with medical expense deduction.--The 
        amounts excluded from gross income under paragraph (1) 
        shall not be taken into account under section 213.
          (8) Coordination with deduction for health insurance 
        costs of self-employed individuals.--The amounts 
        excluded from gross income under paragraph (1) shall 
        not be taken into account under section 162(l).

           *       *       *       *       *       *       *


SEC. 408. INDIVIDUAL RETIREMENT ACCOUNTS.

  (a) Individual retirement account.--For purposes of this 
section, the term ``individual retirement account'' means a 
trust created or organized in the United States for the 
exclusive benefit of an individual or his beneficiaries, but 
only if the written governing instrument creating the trust 
meets the following requirements:
          (1) Except in the case of a rollover contribution 
        described in subsection (d)(3) or in section 402(c), 
        403(a)(4), 403(b)(8), or 457(e)(16), no contribution 
        will be accepted unless it is in cash, and 
        contributions will not be accepted for the taxable year 
        on behalf of any individual in excess of the amount in 
        effect for such taxable year under section 
        219(b)(1)(A).
          (2) The trustee is a bank (as defined in subsection 
        (n)) or such other person who demonstrates to the 
        satisfaction of the Secretary that the manner in which 
        such other person will administer the trust will be 
        consistent with the requirements of this section.
          (3) No part of the trust funds will be invested in 
        life insurance contracts.
          (4) The interest of an individual in the balance in 
        his account is nonforfeitable.
          (5) The assets of the trust will not be commingled 
        with other property except in a common trust fund or 
        common investment fund.
          (6) Under regulations prescribed by the Secretary, 
        rules similar to the rules of section 401(a)(9) and the 
        incidental death benefit requirements of section 401(a) 
        shall apply to the distribution of the entire interest 
        of an individual for whose benefit the trust is 
        maintained.
  (b) Individual retirement annuity.--For purposes of this 
section, the term ``individual retirement annuity'' means an 
annuity contract, or an endowment contract (as determined under 
regulations prescribed by the Secretary), issued by an 
insurance company which meets the following requirements:
          (1) The contract is not transferable by the owner.
          (2) Under the contract--
                  (A) the premiums are not fixed,
                  (B) the annual premium on behalf of any 
                individual will not exceed the dollar amount in 
                effect under section 219(b)(1)(A), and
                  (C) any refund of premiums will be applied 
                before the close of the calendar year following 
                the year of the refund toward the payment of 
                future premiums or the purchase of additional 
                benefits.
          (3) Under regulations prescribed by the Secretary, 
        rules similar to the rules of section 401(a)(9) and the 
        incidental death benefit requirements of section 401(a) 
        shall apply to the distribution of the entire interest 
        of the owner.
          (4) The entire interest of the owner is 
        nonforfeitable.
Such term does not include such an annuity contract for any 
taxable year of the owner in which it is disqualified on the 
application of subsection (e) or for any subsequent taxable 
year. For purposes of this subsection, no contract shall be 
treated as an endowment contract if it matures later than the 
taxable year in which the individual in whose name such 
contract is purchased attains age 701/2; if it is not for the 
exclusive benefit of the individual in whose name it is 
purchased or his beneficiaries; or if the aggregate annual 
premiums under all such contracts purchased in the name of such 
individual for any taxable year exceed the dollar amount in 
effect under section 219(b)(1)(A).
  (c) Accounts established by employers and certain 
associations of employees.--A trust created or organized in the 
United States by an employer for the exclusive benefit of his 
employees or their beneficiaries, or by an association of 
employees (which may include employees within the meaning of 
section 401(c)(1)) for the exclusive benefit of its members or 
their beneficiaries, shall be treated as an individual 
retirement account (described in subsection (a)), but only if 
the written governing instrument creating the trust meets the 
following requirements:
          (1) The trust satisfies the requirements of 
        paragraphs (1) through (6) of subsection (a).
          (2) There is a separate accounting for the interest 
        of each employee or member (or spouse of an employee or 
        member).
The assets of the trust may be held in a common fund for the 
account of all individuals who have an interest in the trust.
  (d) Tax treatment of distributions.--
          (1) In general.--Except as otherwise provided in this 
        subsection, any amount paid or distributed out of an 
        individual retirement plan shall be included in gross 
        income by the payee or distributee, as the case may be, 
        in the manner provided under section 72.
          (2) Special rules for applying section 72.--For 
        purposes of applying section 72 to any amount described 
        in paragraph (1)--
                  (A) all individual retirement plans shall be 
                treated as 1 contract,
                  (B) all distributions during any taxable year 
                shall be treated as 1 distribution, and
                  (C) the value of the contract, income on the 
                contract, and investment in the contract shall 
                be computed as of the close of the calendar 
                year in which the taxable year begins.
        For purposes of subparagraph (C), the value of the 
        contract shall be increased by the amount of any 
        distributions during the calendar year.
          (3) Rollover contribution.--An amount is described in 
        this paragraph as a rollover contribution if it meets 
        the requirements of subparagraphs (A) and (B).
                  (A) In general.--Paragraph (1) does not apply 
                to any amount paid or distributed out of an 
                individual retirement account or individual 
                retirement annuity to the individual for whose 
                benefit the account or annuity is maintained 
                if--
                          (i) the entire amount received 
                        (including money and any other 
                        property) is paid into an individual 
                        retirement account or individual 
                        retirement annuity (other than an 
                        endowment contract) for the benefit of 
                        such individual not later than the 60th 
                        day after the day on which he receives 
                        the payment or distribution; or
                          (ii) the entire amount received 
                        (including money and any other 
                        property) is paid into an eligible 
                        retirement plan for the benefit of such 
                        individual not later than the 60th day 
                        after the date on which the payment or 
                        distribution is received, except that 
                        the maximum amount which may be paid 
                        into such plan may not exceed the 
                        portion of the amount received which is 
                        includible in gross income (determined 
                        without regard to this paragraph).
                For purposes of clause (ii), the term 
                ``eligible retirement plan'' means an eligible 
                retirement plan described in clause (iii), 
                (iv), (v), or (vi) of section 402(c)(8)(B).
                  (B) Limitation.--This paragraph does not 
                apply to any amount described in subparagraph 
                (A)(i) received by an individual from an 
                individual retirement account or individual 
                retirement annuity if at any time during the 1-
                year period ending on the day of such receipt 
                such individual received any other amount 
                described in that subparagraph from an 
                individual retirement account or an individual 
                retirement annuity which was not includible in 
                his gross income because of the application of 
                this paragraph.
                  (C) Denial of rollover treatment for 
                inherited accounts, etc..--
                          (i) In general.--In the case of an 
                        inherited individual retirement account 
                        or individual retirement annuity--
                                  (I) this paragraph shall not 
                                apply to any amount received by 
                                an individual from such an 
                                account or annuity (and no 
                                amount transferred from such 
                                account or annuity to another 
                                individual retirement account 
                                or annuity shall be excluded 
                                from gross income by reason of 
                                such transfer), and
                                  (II) such inherited account 
                                or annuity shall not be treated 
                                as an individual retirement 
                                account or annuity for purposes 
                                of determining whether any 
                                other amount is a rollover 
                                contribution.
                          (ii) Inherited individual retirement 
                        account or annuity.--An individual 
                        retirement account or individual 
                        retirement annuity shall be treated as 
                        inherited if--
                                  (I) the individual for whose 
                                benefit the account or annuity 
                                is maintained acquired such 
                                account by reason of the death 
                                of another individual, and
                                  (II) such individual was not 
                                the surviving spouse of such 
                                other individual.
                  (D) Partial rollovers permitted.--
                          (i) In general.--If any amount paid 
                        or distributed out of an individual 
                        retirement account or individual 
                        retirement annuity would meet the 
                        requirements of subparagraph (A) but 
                        for the fact that the entire amount was 
                        not paid into an eligible plan as 
                        required by clause (i) or (ii) of 
                        subparagraph (A), such amount shall be 
                        treated as meeting the requirements of 
                        subparagraph (A) to the extent it is 
                        paid into an eligible plan referred to 
                        in such clause not later than the 60th 
                        day referred to in such clause.
                          (ii) Eligible plan.--For purposes of 
                        clause (i), the term ``eligible plan'' 
                        means any account, annuity, contract, 
                        or plan referred to in subparagraph 
                        (A).
                  (E) Denial of rollover treatment for required 
                distributions.--This paragraph shall not apply 
                to any amount to the extent such amount is 
                required to be distributed under subsection 
                (a)(6) or (b)(3).
                  (F) Frozen deposits.--For purposes of this 
                paragraph, rules similar to the rules of 
                section 402(c)(7) (relating to frozen deposits) 
                shall apply.
                  (G) Simple retirement accounts.--In the case 
                of any payment or distribution out of a simple 
                retirement account (as defined in subsection 
                (p)) to which section 72(t)(6) applies, this 
                paragraph shall not apply unless such payment 
                or distribution is paid into another simple 
                retirement account.
                  (H) Application of section 72.--
                          (i) In general.--If--
                                  (I) a distribution is made 
                                from an individual retirement 
                                plan, and
                                  (II) a rollover contribution 
                                is made to an eligible 
                                retirement plan described in 
                                section 402(c)(8)(B)(iii), 
                                (iv), (v), or (vi) with respect 
                                to all or part of such 
                                distribution,
                 then, notwithstanding paragraph (2), the rules 
                of clause (ii) shall apply for purposes of 
                applying section 72.
                          (ii) Applicable rules.--In the case 
                        of a distribution described in clause 
                        (i)--
                                  (I) section 72 shall be 
                                applied separately to such 
                                distribution,
                                  (II) notwithstanding the pro 
                                rata allocation of income on, 
                                and investment in, the contract 
                                to distributions under section 
                                72, the portion of such 
                                distribution rolled over to an 
                                eligible retirement plan 
                                described in clause (i) shall 
                                be treated as from income on 
                                the contract (to the extent of 
                                the aggregate income on the 
                                contract from all individual 
                                retirement plans of the 
                                distributee), and
                                  (III) appropriate adjustments 
                                shall be made in applying 
                                section 72 to other 
                                distributions in such taxable 
                                year and subsequent taxable 
                                years.
                  (I) Waiver of 60-day requirement.--The 
                Secretary may waive the 60-day requirement 
                under subparagraphs (A) and (D) where the 
                failure to waive such requirement would be 
                against equity or good conscience, including 
                casualty, disaster, or other events beyond the 
                reasonable control of the individual subject to 
                such requirement.
          (4) Contributions returned before due date of 
        return.--Paragraph (1) does not apply to the 
        distribution of any contribution paid during a taxable 
        year to an individual retirement account or for an 
        individual retirement annuity if--
                  (A) such distribution is received on or 
                before the day prescribed by law (including 
                extensions of time) for filing such 
                individual's return for such taxable year,
                  (B) no deduction is allowed under section 219 
                with respect to such contribution, and
                  (C) such distribution is accompanied by the 
                amount of net income attributable to such 
                contribution.
        In the case of such a distribution, for purposes of 
        section 61, any net income described in subparagraph 
        (C) shall be deemed to have been earned and receivable 
        in the taxable year in which such contribution is made.
          (5) Distributions of excess contributions after due 
        date for taxable year and certain excess rollover 
        contributions.--
                  (A) In general.--In the case of any 
                individual, if the aggregate contributions 
                (other than rollover contributions) paid for 
                any taxable year to an individual retirement 
                account or for an individual retirement annuity 
                do not exceed the dollar amount in effect under 
                section 219(b)(1)(A), paragraph (1) shall not 
                apply to the distribution of any such 
                contribution to the extent that such 
                contribution exceeds the amount allowable as a 
                deduction under section 219 for the taxable 
                year for which the contribution was paid--
                          (i) if such distribution is received 
                        after the date described in paragraph 
                        (4),
                          (ii) but only to the extent that no 
                        deduction has been allowed under 
                        section 219 with respect to such excess 
                        contribution.
                If employer contributions on behalf of the 
                individual are paid for the taxable year to a 
                simplified employee pension, the dollar 
                limitation of the preceding sentence shall be 
                increased by the lesser of the amount of such 
                contributions or the dollar limitation in 
                effect under section 415(c)(1)(A) for such 
                taxable year.
                  (B) Excess rollover contributions 
                attributable to erroneous information.--If--
                          (i) the taxpayer reasonably relies on 
                        information supplied pursuant to 
                        subtitle F for determining the amount 
                        of a rollover contribution, but
                          (ii) the information was erroneous,
                subparagraph (A) shall be applied by increasing 
                the dollar limit set forth therein by that 
                portion of the excess contribution which was 
                attributable to such information.
        For purposes of this paragraph, the amount allowable as 
        a deduction under section 219 shall be computed without 
        regard to section 219(g).
          (6) Transfer of account incident to divorce.--The 
        transfer of an individual's interest in an individual 
        retirement account or an individual retirement annuity 
        to [his spouse] the individual's spouse or former 
        spouse under a divorce or separation instrument 
        described in clause (i) of section 121(d)(3)(C) is not 
        to be considered a taxable transfer made by such 
        individual notwithstanding any other provision of this 
        subtitle, and such interest at the time of the transfer 
        is to be treated as an individual retirement account of 
        such spouse, and not of such individual. Thereafter 
        such account or annuity for purposes of this subtitle 
        is to be treated as maintained for the benefit of such 
        spouse.
          (7) Special rules for simplified employee pensions or 
        simple retirement accounts.--
                  (A) Transfer or rollover of contributions 
                prohibited until deferral test met.--
                Notwithstanding any other provision of this 
                subsection or section 72(t), paragraph (1) and 
                section 72(t)(1) shall apply to the transfer or 
                distribution from a simplified employee pension 
                of any contribution under a salary reduction 
                arrangement described in subsection (k)(6) (or 
                any income allocable thereto) before a 
                determination as to whether the requirements of 
                subsection (k)(6)(A)(iii) are met with respect 
                to such contribution.
                  (B) Certain exclusions treated as 
                deductions.--For purposes of paragraphs (4) and 
                (5) and section 4973, any amount excludable or 
                excluded from gross income under section 402(h) 
                or 402(k) shall be treated as an amount 
                allowable or allowed as a deduction under 
                section 219.
          (8) Distributions for charitable purposes.--
                  (A) In general.--So much of the aggregate 
                amount of qualified charitable distributions 
                with respect to a taxpayer made during any 
                taxable year which does not exceed $100,000 
                shall not be includible in gross income of such 
                taxpayer for such taxable year.
                  (B) Qualified charitable distribution.--For 
                purposes of this paragraph, the term 
                ``qualified charitable distribution'' means any 
                distribution from an individual retirement plan 
                (other than a plan described in subsection (k) 
                or (p))--
                          (i) which is made directly by the 
                        trustee to an organization described in 
                        section 170(b)(1)(A) (other than any 
                        organization described in section 
                        509(a)(3) or any fund or account 
                        described in section 4966(d)(2)), and
                          (ii) which is made on or after the 
                        date that the individual for whose 
                        benefit the plan is maintained has 
                        attained age 701/2.
                A distribution shall be treated as a qualified 
                charitable distribution only to the extent that 
                the distribution would be includible in gross 
                income without regard to subparagraph (A).
                  (C) Contributions must be otherwise 
                deductible.--For purposes of this paragraph, a 
                distribution to an organization described in 
                subparagraph (B)(i) shall be treated as a 
                qualified charitable distribution only if a 
                deduction for the entire distribution would be 
                allowable under section 170 (determined without 
                regard to subsection (b) thereof and this 
                paragraph).
                  (D) Application of section 72.--
                Notwithstanding section 72, in determining the 
                extent to which a distribution is a qualified 
                charitable distribution, the entire amount of 
                the distribution shall be treated as includible 
                in gross income without regard to subparagraph 
                (A) to the extent that such amount does not 
                exceed the aggregate amount which would have 
                been so includible if all amounts in all 
                individual retirement plans of the individual 
                were distributed during such taxable year and 
                all such plans were treated as 1 contract for 
                purposes of determining under section 72 the 
                aggregate amount which would have been so 
                includible. Proper adjustments shall be made in 
                applying section 72 to other distributions in 
                such taxable year and subsequent taxable years.
                  (E) Denial of deduction.--Qualified 
                charitable distributions which are not 
                includible in gross income pursuant to 
                subparagraph (A) shall not be taken into 
                account in determining the deduction under 
                section 170.
          (9) Distribution for health savings account 
        funding.--
                  (A) In general.--In the case of an individual 
                who is an eligible individual (as defined in 
                section 223(c)) and who elects the application 
                of this paragraph for a taxable year, gross 
                income of the individual for the taxable year 
                does not include a qualified HSA funding 
                distribution to the extent such distribution is 
                otherwise includible in gross income.
                  (B) Qualified HSA funding distribution.--For 
                purposes of this paragraph, the term 
                ``qualified HSA funding distribution'' means a 
                distribution from an individual retirement plan 
                (other than a plan described in subsection (k) 
                or (p)) of the employee to the extent that such 
                distribution is contributed to the health 
                savings account of the individual in a direct 
                trustee-to-trustee transfer.
                  (C) Limitations.--
                          (i) Maximum dollar limitation.--The 
                        amount excluded from gross income by 
                        subparagraph (A) shall not exceed the 
                        excess of--
                                  (I) the annual limitation 
                                under section 223(b) computed 
                                on the basis of the type of 
                                coverage under the high 
                                deductible health plan covering 
                                the individual at the time of 
                                the qualified HSA funding 
                                distribution, over
                                  (II) in the case of a 
                                distribution described in 
                                clause (ii)(II), the amount of 
                                the earlier qualified HSA 
                                funding distribution.
                          (ii) One-time transfer.--
                                  (I) In general.--Except as 
                                provided in subclause (II), an 
                                individual may make an election 
                                under subparagraph (A) only for 
                                one qualified HSA funding 
                                distribution during the 
                                lifetime of the individual. 
                                Such an election, once made, 
                                shall be irrevocable.
                                  (II) Conversion from self-
                                only to family coverage.--If a 
                                qualified HSA funding 
                                distribution is made during a 
                                month in a taxable year during 
                                which an individual has self-
                                only coverage under a high 
                                deductible health plan as of 
                                the first day of the month, the 
                                individual may elect to make an 
                                additional qualified HSA 
                                funding distribution during a 
                                subsequent month in such 
                                taxable year during which the 
                                individual has family coverage 
                                under a high deductible health 
                                plan as of the first day of the 
                                subsequent month.
                  (D) Failure to maintain high deductible 
                health plan coverage.--
                          (i) In general.--If, at any time 
                        during the testing period, the 
                        individual is not an eligible 
                        individual, then the aggregate amount 
                        of all contributions to the health 
                        savings account of the individual made 
                        under subparagraph (A)--
                                  (I) shall be includible in 
                                the gross income of the 
                                individual for the taxable year 
                                in which occurs the first month 
                                in the testing period for which 
                                such individual is not an 
                                eligible individual, and
                                  (II) the tax imposed by this 
                                chapter for any taxable year on 
                                the individual shall be 
                                increased by 10 percent of the 
                                amount which is so includible.
                          (ii) Exception for disability or 
                        death.--Subclauses (I) and (II) of 
                        clause (i) shall not apply if the 
                        individual ceased to be an eligible 
                        individual by reason of the death of 
                        the individual or the individual 
                        becoming disabled (within the meaning 
                        of section 72(m)(7)).
                          (iii) Testing period.--The term 
                        ``testing period'' means the period 
                        beginning with the month in which the 
                        qualified HSA funding distribution is 
                        contributed to a health savings account 
                        and ending on the last day of the 12th 
                        month following such month.
                  (E) Application of section 72.--
                Notwithstanding section 72, in determining the 
                extent to which an amount is treated as 
                otherwise includible in gross income for 
                purposes of subparagraph (A), the aggregate 
                amount distributed from an individual 
                retirement plan shall be treated as includible 
                in gross income to the extent that such amount 
                does not exceed the aggregate amount which 
                would have been so includible if all amounts 
                from all individual retirement plans were 
                distributed. Proper adjustments shall be made 
                in applying section 72 to other distributions 
                in such taxable year and subsequent taxable 
                years.
  (e) Tax treatment of accounts and annuities.--
          (1) Exemption from tax.--Any individual retirement 
        account is exempt from taxation under this subtitle 
        unless such account has ceased to be an individual 
        retirement account by reason of paragraph (2) or (3). 
        Notwithstanding the preceding sentence, any such 
        account is subject to the taxes imposed by section 511 
        (relating to imposition of tax on unrelated business 
        income of charitable, etc. organizations).
          (2) Loss of exemption of account where employee 
        engages in prohibited transaction.--
                  (A) In general.--If, during any taxable year 
                of the individual for whose benefit any 
                individual retirement account is established, 
                that individual or his beneficiary engages in 
                any transaction prohibited by section 4975 with 
                respect to such account, such account ceases to 
                be an individual retirement account as of the 
                first day of such taxable year. For purposes of 
                this paragraph--
                          (i) the individual for whose benefit 
                        any account was established is treated 
                        as the creator of such account, and
                          (ii) the separate account for any 
                        individual within an individual 
                        retirement account maintained by an 
                        employer or association of employees is 
                        treated as a separate individual 
                        retirement account.
                  (B) Account treated as distributing all its 
                assets.--In any case in which any account 
                ceases to be an individual retirement account 
                by reason of subparagraph (A) as of the first 
                day of any taxable year, paragraph (1) of 
                subsection (d) applies as if there were a 
                distribution on such first day in an amount 
                equal to the fair market value (on such first 
                day) of all assets in the account (on such 
                first day).
          (3) Effect of borrowing on annuity contract.--If 
        during any taxable year the owner of an individual 
        retirement annuity borrows any money under or by use of 
        such contract, the contract ceases to be an individual 
        retirement annuity as of the first day of such taxable 
        year. Such owner shall include in gross income for such 
        year an amount equal to the fair market value of such 
        contract as of such first day.
          (4) Effect of pledging account as security.--If, 
        during any taxable year of the individual for whose 
        benefit an individual retirement account is 
        established, that individual uses the account or any 
        portion thereof as security for a loan, the portion so 
        used is treated as distributed to that individual.
          (5) Purchase of endowment contract by individual 
        retirement account.--If the assets of an individual 
        retirement account or any part of such assets are used 
        to purchase an endowment contract for the benefit of 
        the individual for whose benefit the account is 
        established--
                  (A) to the extent that the amount of the 
                assets involved in the purchase are not 
                attributable to the purchase of life insurance, 
                the purchase is treated as a rollover 
                contribution described in subsection (d)(3), 
                and
                  (B) to the extent that the amount of the 
                assets involved in the purchase are 
                attributable to the purchase of life, health, 
                accident, or other insurance, such amounts are 
                treated as distributed to that individual (but 
                the provisions of subsection (f) do not apply).
          (6) Commingling individual retirement account amounts 
        in certain common trust funds and common investment 
        funds.--Any common trust fund or common investment fund 
        of individual retirement account assets which is exempt 
        from taxation under this subtitle does not cease to be 
        exempt on account of the participation or inclusion of 
        assets of a trust exempt from taxation under section 
        501(a) which is described in section 401(a).
  (g) Community property laws.--This section shall be applied 
without regard to any community property laws.
  (h) Custodial accounts.--For purposes of this section, a 
custodial account shall be treated as a trust if the assets of 
such account are held by a bank (as defined in subsection (n)) 
or another person who demonstrates, to the satisfaction of the 
Secretary, that the manner in which he will administer the 
account will be consistent with the requirements of this 
section, and if the custodial account would, except for the 
fact that it is not a trust, constitute an individual 
retirement account described in subsection (a). For purposes of 
this title, in the case of a custodial account treated as a 
trust by reason of the preceding sentence, the custodian of 
such account shall be treated as the trustee thereof.
  (i) Reports.--The trustee of an individual retirement account 
and the issuer of an endowment contract described in subsection 
(b) or an individual retirement annuity shall make such reports 
regarding such account, contract, or annuity to the Secretary 
and to the individuals for whom the account, contract, or 
annuity is, or is to be, maintained with respect to 
contributions (and the years to which they relate), 
distributions aggregating $10 or more in any calendar year, and 
such other matters as the Secretary may require. The reports 
required by this subsection--
          (1) shall be filed at such time and in such manner as 
        the Secretary prescribes, and
          (2) shall be furnished to individuals--
                  (A) not later than January 31 of the calendar 
                year following the calendar year to which such 
                reports relate, and
                  (B) in such manner as the Secretary 
                prescribes.
In the case of a simple retirement account under subsection 
(p), only one report under this subsection shall be required to 
be submitted each calendar year to the Secretary (at the time 
provided under paragraph (2)) but, in addition to the report 
under this subsection, there shall be furnished, within 31 days 
after each calendar year, to the individual on whose behalf the 
account is maintained a statement with respect to the account 
balance as of the close of, and the account activity during, 
such calendar year.
  (j) Increase in maximum limitations f